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Information to Help You Prepare and File Your 2011 Federal Income Tax Return

 

It’s tax season again, and this article will help answer questions about preparing and filing your tax returns. While the deadline to file your tax return usually falls on April 15, this year the deadline has been extended by two days. This is because April 15 falls on a Sunday this year and Monday, April 16 is a holiday in Washington D.C. called Emancipation Day. That means that tax filers have until Tuesday, April 17, 2012, to file their return and pay their taxes.

If your income is low and you need help preparing and filing your tax return, there are a number of ways you may get help. See FREE TAX PREPARATION FOR LOW-INCOME TAXPAYERS for information about getting help with preparing your taxes. But let’s start by answering some of the questions we hear most frequently.

Are there any changes I should know about for the 2011 tax year?

Yes. There have been increases in the required filing threshold, the amount for each exemption, the standard deduction, and the Earned Income Tax Credit. Also, the American Opportunity education credit has expanded. All of these things are discussed in more detail below.

Do I have to file a tax return?

Whether you are required to file a tax return depends on your age, filing status, and gross income. The amount of taxable income you can receive before you are required to file a tax return is called a filing threshold. Filing thresholds have been increased for the 2011 tax year. You may use the following table to see if you are required to file a federal tax return.

 

Child Welfare Court Process At Glance
**This table does not apply to people who are self-employed. You are required to file a tax return if you have more than $400 in self-employment income.

 

Publication 501, Dec 2011

Note that there are different filing rules for a person who has been claimed as a dependent by another taxpayer. For example, if you are a student and your parents have claimed you as a dependent on their tax return, you may still have an obligation to file your own return. Whether or not you must file depends upon the amount of earned income (tips, wages, and other money you may have received for work performed) and unearned income (this includes things such as bank interest) you received during the year. The filing requirements for someone who has been claimed as a dependent differ depending on age and marital status of the dependent. If someone claims you as a dependent and you had some income in 2011, you should review Table 2 of IRS Publication 501 to see if you are required by law to file a tax return.


Important Note: If you worked during the year, filing a tax return can often be a good idea, even if your income is so low that you are not required to file a tax return. This is because you may be entitled to a refund of taxes that were withheld from your paycheck during the year. You may also be entitled to other refundable tax credits. You will not get a tax refund unless you file a tax return. If you are reading this and think that you may have been due a refund in previous years but didn’t file a tax return there may still be time—you have three years to file a tax return that requests a refund.

What is the difference between an exemption and a deduction, and how can this help me?

Exemptions. An exemption is the dollar amount that the IRS determines should be excluded (exempt) from any tax. Each person in a household is eligible for an exemption, thereby reducing the amount of overall income on which you pay tax. The amount of the exemption (the amount you can deduct for each person) was increased to $3,700 for 2011. Let’s look at a practical example to see how this works:

Annie is a single parent with one child. She made $24,000 in 2011. Annie is permitted to take a personal exemption for herself and a dependent exemption for her daughter. This means that Annie can take a total of $7,400 in exemptions ($3,700 for herself and $3,700 for her daughter).

$24,000
  Gross Income
-   7,400
  Exemptions
$16,600
  Adjusted Gross Income

So, you can see that because of the two exemptions, Annie now only pays tax on $16,600 in income. This amount will be reduced further by other deductions and tax credits.

Deductions. In addition to any exemptions you may take, you may also claim deductions. You may either take what is known as a standard deduction or you may take itemized deductions. You choose which one is the most beneficial to you.

A standard deduction is a flat amount that the IRS permits you to take if you don’t itemize your deductions. Unlike exemptions, which you may take for each qualifying person in a household, you may only take one standard deduction. The dollar amount of your standard deduction depends upon your filing status. The following chart lists the dollar amount of the 2011 standard deduction.

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Table 6, IRS Publication 501, Dec 2011

Let’s see how standard deductions work by continuing with our earlier example. We previously saw how the total amount of Annie’s taxable income decreased from $24,000 to $16,600 after exemptions. Now let’s adjust for deductions based on the following facts. Annie rents an apartment and does not have a lot of deductions to itemize. (Things such as mortgage interest, property taxes, and unreimbursed business expenses are examples of deductions you may itemize.) Annie doesn’t have any of these, so she takes the standard deduction. Since she is a single parent with a child, her filing status is Head of Household. When we look at the above chart, we see that Annie can take a standard deduction of $8,500. This gives her a final taxable income of $8,100—that’s a big difference from her original income of $24,000.

$24,000
  Gross Income
-   7,400
  Exemptions
$16,600
  Adjusted Gross Income
-   8,500
  Standard Deduction
$  8,100
  Taxable Income

What about tax credits?

Unlike exemptions and deductions that reduce the amount of income on which your tax is calculated, tax credits reduce the actual amount of your tax. There are a number of tax credits available for families, such as the Child Tax Credit, the Child and Dependent Care Tax Credit, and the EITC.

Earned Income Tax Credit (EITC)

One of the most valuable tax credits is the Earned Income Tax Credit or EITC. The EITC is very important because it is fully refundable, meaning that you may still get money back, even if you did not owe any tax. The amount of the EITC varies based on income and family size. Generally, the EITC does not increase if you have more than two children, but there is an expanded benefit available through 2012 for families with three or more children. For tax year 2011, the maximum income and credit amounts are listed in the table below.

2011 EITC

 

Maximum Income
Single/Head of Household

Maximum Income
Married Filing Jointly

Maximum
Credit

Single (no children)

$13,660

$18,740

$   464

With one qualifying child

$36,052

$41,132

$3,094

With two qualifying children

$40,964

$46,044

$5,112

With three or more qualifying children

$43,998

$49,078

$5,751

Just because you qualify for the EITC does not mean that you will get the maximum credit. The amount of your EITC will vary depending on the amount of your earned income. If your income qualifies you for the EITC, it is likely that you also qualify for free tax preparation services. So, you may want to get assistance to prepare your return.

There are a lot of rules to qualify for the EITC. For more information, see What is the difference between exemptions, deductions, and credits? (from 2010 Income Tax Questions and Answers).

Fraudulent Tax Preparation

At tax time, some people will try to take advantage of taxpayers. There are no licenses necessary to prepare returns, and some people may call themselves tax preparers, charge you money, and then prepare your tax return improperly. Fraudulent tax preparation usually involves a preparer who improperly increases expenses, itemizes deductions and exemptions in order to reduce the amount of tax you have to pay, or increase the amount of a refund. If your tax return includes deductions for personal or business expenses, you should have the receipts to back it up.

If you are paying someone to prepare your tax return, the preparer should sign the return and enter a Preparer Identification Number (PTIN). If a paid tax preparer does not sign the return and enter a PTIN, there is a good chance that he or she is not legitimate. Be careful of people who promise to (1) increase your EITC refund, (2) get you a lot of other tax credits by increasing the amount of your income or the number of children claimed, or (3) change your filing status so that you qualify for more exemptions or tax credits. For example, if you are married, in order to qualify for the EITC you must file your tax return with a status of Married Filing Jointly. You and your spouse may not each file a separate return as Head of Household to try to get a higher tax credit. All of these actions are fraud and can carry very serious penalties. Not only will you have to pay back any money you receive, but you may even lose the right to claim future EITC refunds for up to 10 years.

When you sign a tax return you are agreeing that you have reviewed the tax return and that the information contained on the return is accurate and correct. If the return is wrong, it is the taxpayer (you!), and not the preparer, who is responsible for paying the money back to the IRS, along with any interest and penalties.


My home suffered damage and I lost tax documents as a result of Hurricane Irene. Is there anything I can do?

Many people in New Jersey experienced losses in 2011 because of Hurricane Irene. If you lost tax records as a result of flooding from the hurricane, you may request copies of your tax return from the IRS. Normally, if you want an actual copy of a tax return filed in a previous year (as opposed to a printed transcript), the IRS will charge you $57 per return. The IRS, however, is waiving these fees for people affected by the hurricane.

You may also ask that the copies of your tax returns be expedited (sent more quickly) so you will get them sooner. To request an expedited copy of a previously filed tax return, use IRS Form 4506, Request for Copy of Tax Return. Fill out the form, write “Hurricane Irene-NJ” clearly in red ink on the top of the form, and send it to the IRS.

For more information on IRS disaster relief for hurricane victims, see Federal Tax Relief for Victims of Hurricane Irene

I lived with my girlfriend and her child from another relationship for all of 2011. She works a little bit, but I give her money to take care of her daughter. Can I claim her daughter as a dependent on my tax return?

This is a complicated question. You need to be very careful about claiming a child with whom you do not have a biological relationship when the parent of that child is living with you. In this case, you probably may not claim the child.

In general, as we discussed above, you may claim one exemption for each of your dependents. This is known as a dependent exemption. While you may contribute money to a child, that alone does not mean the child is a dependent for tax purposes. In order to claim a child on your taxes, the child would need to meet the IRS’s definition of a qualifying child or a qualifying relative. So, we need to look at the facts in every case to see whether those definitions are met. Let’s start by looking at whether the boyfriend in this case may claim his girlfriend’s daughter under the qualifying child rules.

There are five tests that must be met in order to claim a child as a qualifying child. They are: relationship, age, residency, support, and joint return. All five of these tests must be met in order to claim the child. Under the relationship test, the child must be your son, daughter, stepchild, foster child, brother, sister, half-brother, half-sister, step- brother, stepsister, or a descendant of any of them (for example, a grandchild would be the descendant of a person’s son). In other words, there must be a direct biological, adoptive, or foster care relationship in order to claim the child in as a qualifying child. That’s not true here—in this case, the child is the daughter of a girlfriend. So, the very first test, the relationship test, cannot be met. Since the first test can’t be met, we don’t need to look at the other four remaining tests. We know from the start that the daughter of a girlfriend may not be claimed by the boyfriend as a qualifying child.

We then need to look at whether the child in this case may be claimed by the boyfriend as a qualifying relative. Even though the word “relative” is in the test, a biological relationship is not always required. There are four tests that must be met in order to claim a child as a qualifying relative. These are: relationship, income, support, and whether the child is the qualifying child of another.

In order to meet the relationship test, you must be related to the child or have lived with the child for the entire year. So, for the purposes of our example, it is the second part of that test that is key. In this case, the facts tell us that they lived in the same household for all of 2011, so this test is met.

We then go to the second test—the income test. You may only claim a person as a qualifying relative if that person had less than $3,700 in income for the year. We’ll assume in this case that the child is young and had no income in 2011. In that case, the income test is met. So far, so good.

Then we look at the third test, which is the support test. That test asks whether you have provided more than half of the child’s support for the year. So, this starts to get tricky—the boyfriend in this case would have to determine whether he provided more than half the child’s support in 2011. To determine if you paid more than half the child's support, use the worksheet in IRS Publication 501, page 20. We don’t really know here—there aren’t enough facts. Assuming that the boyfriend did provide more than half of the child’s support, that test would be met and we would move to the final step in the analysis—whether the person may be a qualifying child of another taxpayer.

The last test is important and is often the reason someone cannot claim a child who does not have a biological relationship with them. Under the fourth test, you may not claim a person as a qualifying relative if that person may be claimed as a qualifying child by any other taxpayer. If the mother in this case has a tax obligation and is filing a tax return, her daughter would be her qualifying child. If that’s the case, the boyfriend may not claim the child.

The Internal Revenue Service has created a good, easy-to-use interactive tool (Who Can I Claim as a Dependent?) that can help you determine if you can claim someone as your dependent. It’s also important in these cases that you give the person preparing your tax return all the facts, so they can make a proper determination.

I have children in another country and send money home to them. May I claim them as dependents?

Generally, no. In order to claim someone as a dependent, that person must meet a residency test. That means that the person must be a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico. (There is an exception to this rule when you adopt a child from another country.)

I have a child in college who works part time. She lives at home and I pay for most of her support. May I claim her as a dependent?

Yes, you may be able to claim a dependent exemption for your child while she is in college. There are two important things you should be aware of if you do this.

First, even if you claim your child as a dependent, your child may be required to file her own tax return. Whether your child is required to file her own return generally depends on her income, marital status, and filing status.

Second, if you are claiming a child as a dependent, then your child cannot take a personal exemption for herself if she files her own tax return. This makes sense if you think about it. Your child is one person and there may be only one exemption taken for that person. So, you may take the exemption for your child as a dependent exemption, or your child may claim that exemption as a personal exemption on her own return. But you both may not claim the exemption—or one person would be counted twice. Remember, when you file tax returns, you need to include Social Security numbers for your dependents. This is how the IRS tracks who has been claimed. If you both claim the exemption, the IRS will send a notice to both of you indicating that there was a duplicate filing.

I gave my child money for tuition. Are there any education tax credits?

Yes. Two education credits—the American Opportunity credit and the Lifetime Learning credit—are available for tax year 2011. In order to claim the credit, you must meet income, residency, and other requirements. The amount of the credit and the criteria to qualify vary depending on the type of education credit. You may only claim one of these credits per student per year—you cannot claim both in the same year. It is important that you understand the differences between them.

Taxpayers may take education credits for themselves, their spouse, and any dependents claimed on their tax return. To qualify for the credit, the student must have enrolled or attended an eligible post-secondary educational institution during 2011. An eligible institution is any college, university, vocational school, or other post-secondary educational institution that participates in a student aid program administered by the U.S. Department of Education. If you are not sure whether your school qualifies, you may search The Database of Accredited Postsecondary Institutions and Programs.

Only certain education expenses, such as tuition and other required student attendance fees, may be claimed for purposes of these credits. Personal expenses such as room and board, medical insurance, and transportation costs do not qualify. Required books, supplies, and materials may qualify depending on the type of education credit you are applying for and whether payments for these items were made to the educational institution directly. Money used to pay these expenses from certain sources—such as some federal grants, scholarships, or education assistance from an employer or the Veterans Administration—may not be included when calculating the tax credit. Students should receive a Form 1098-T from their educational institution. This form contains information on qualified expenses and scholarships, and it is important to have this document when you prepare your tax return.

American Opportunity Credit. The American Opportunity credit may only be claimed during the first four years of post-secondary education (this is generally the four years of college), and the student must be enrolled at least half-time and be in a degree program to qualify. Additionally, a felony drug conviction will disqualify the student from this credit. The maximum American Opportunity credit was expanded a bit for 2011, and is now up to $2,500 per student per year (100% of the first $2,000 and 25% of the second $2,000). A portion of the credit may be refundable, meaning that you can get back up to $1,000, even if you don’t owe any tax.

Lifetime Learning credit. By contrast, the Lifetime Learning credit is available for any year of post-secondary education, and a student does not have to be enrolled half-time or have entered into a degree program to qualify. So, someone taking an evening course to strengthen his or her work skills, for example, would qualify for this credit. The felony drug conviction rule also does not apply. No portion of the Lifetime Learning credit, however, is refundable. The maximum amount of the Lifetime Learning credit is $2,000 (20% of the first $10,000) per year.

REFUNDS

I’m due a refund, but haven’t received it yet. How can I check the status of my refund?

There are three ways to check the status of your refund. Regardless of the method you use to check the status of your refund, you will need to provide your Social Security number, filing status, and the exact whole dollar amount of the refund as it appears on your return. So, you should have this information handy.

Visit the IRS website's Where's My Refund - It's Quick, Easy, and Secure page. You may also call the IRS Refund Hotline at 1-800-829-1954. Lastly, if you have a smartphone or mobile device, you can check the status of your refund using the IRS2Go smartphone application. The free application can be downloaded from the Android Marketplace and Apple App Store.

Last year, the IRS took a long time to issue my refund. Is there a problem?

Maybe. In recent years, the IRS has increased scrutiny of tax returns for signs of fraud. If the IRS has reason to suspect that your tax return contained improper information, the return may be subject to additional screening and review. Tax returns selected for this additional review will be processed by the IRS’s Accounts Management Taxpayer Assurance Program (AMTAP) before being released.

During 2011, AMTAP held refunds in order to verify the income and withholdings reported on tax returns. It also held refunds to verify W-2 information that it suspected might not be correct. This happened, for example, where an employer failed to file the proper paperwork with the IRS, so there was no record of employment. In other cases, two taxpayers may have filed returns using the same Social Security number, and there may have issues of identity theft. It is expected that AMTAP will delay even more returns in 2012.

In AMTAP cases, taxpayers usually receive a letter or notice from the IRS. AMTAP might also contact third parties, such as an employer, to confirm employment and wages. AMTAP is required to notify taxpayers when it intends to contact a third party to verify the information on a return or W-2.

While the IRS has taken these steps to prevent fraud, many taxpayers who did nothing wrong got caught in these reviews and experienced very long delays in getting their refunds released. Tax refunds are important and are often relied upon to pay for housing, utilities, and food. If your refund is delayed and you are experiencing a financial hardship, you can contact the Taxpayer Advocate Service (TAS) at (973) 921-4043. TAS is an independent division of the IRS that deals with these sorts of problems. TAS is very aware of this issue and can act to make sure the tax return verification and processing moves more quickly. Taxpayers can also help to move this process along by contacting their employer for employment verification. (A letter on company letterhead indicating the wages earned in the previous year and tax withheld is usually sufficient.)

What are the advantages and disadvantages of getting my refund through direct deposit?

A good way to get your refund quickly is to have the refund deposited directly into your bank account. The IRS offers taxpayers the ability to deposit their tax refunds directly among as many as three different checking or savings accounts and up to three different U.S. financial institutions. You can use the split refund option by using a Form 8888, Allocation of Refund. While this is a nice feature and can get your tax refund to you more quickly, you need to take extreme care. If you take advantage of direct deposit, make sure to triple-check the account number(s) and routing number(s) on the tax return or Form 8888 to make sure that they are clear and correct. You should do this regardless of whether you prepare the return or whether you pay someone to prepare the tax return for you. Generally, if a taxpayer error in the direct deposit account information provided with the return causes your refund to be deposited into an incorrect bank account, the IRS will not reissue your refund or help you to reclaim the money. The IRS should assist you if an IRS or bank error caused the problem.

When the IRS issues a refund to a bank, the banking institution should check to make sure that the Social Security number and name of the taxpayer match the information on the bank account. If these do not match, the bank should return the money to the IRS, which then issues a paper check to the taxpayer. This review by the bank, however, is not always done, and in some cases the refunds are deposited by the bank into the incorrect account. If this happens, it can be difficult to get the money back.

While the IRS will help taxpayers to get a replacement paper check for a refund check that is verified as lost or stolen, it will not help where a refund has been directly deposited into an incorrect bank account because of an error made by the taxpayer. If you are expecting a direct deposit refund and don’t get it, you should check the status of the refund. If you learn that the refund has been deposited into an incorrect bank account, you should contact the bank immediately.

A few other words of caution about direct deposit: First, some banks will not allow a joint refund to be directly deposited into an individual bank account. So, you may want to check with your bank in advance to make sure that the direct deposit will be accepted. Second, some unscrupulous tax preparers will have you use the Form 8888 to designate a portion of your refund as payment to them for their services. This is improper, and a reputable tax preparer will not ask you to do this.

I received an email from the IRS telling me there might be a problem with my refund and to contact them. Is this legitimate?

No! The IRS never communicates with taxpayers via email. You should always be suspicious of any email that requests information such as your Social Security number, bank information, address, passwords, or other private information. These types of email are scams. They are sent around tax time to lure taxpayers into giving up personal and financial information, which can lead to identity theft and monetary theft. If you get an email stating that your tax refund has been delayed or that you need to provide additional information in order for your tax return to be processed, do not open the email or click on any links. Immediately forward the email to phishing@irs.gov.

FREE TAX PREPARATION FOR LOW-INCOME TAXPAYERS

If you are a low-income taxpayer, there are a number of different services that you can use to help you to prepare and file your taxes for free.

IRS Free File Program. The IRS Free File program makes commercial tax preparation software available to low-income taxpayers at no cost. If you had less than $57,000 in adjusted gross income for 2011, these programs will help you to complete and file your tax return for free. To use Free File, visit the IRS Free File page. You will need to select the tax software that best suits your needs. Once you choose a preparer, you will leave the IRS website and be taken to the commercial preparer’s site. The software will prompt you to enter answers to a series of questions related to income and family. A federal tax return will be prepared based on your answers to these questions. The return will then be filed electronically. Note that this may not be an option for filing your state tax return, so you may want to consider one of the other in-person tax preparation options listed below.

Volunteer Income Tax Assistance (VITA). The VITA program generally offers free tax preparation services to people with incomes below $49,000. VITA sites are staffed with volunteers who are trained to prepare tax returns. The sites are usually located at libraries, senior centers, and other local community centers. To find the VITA center in New Jersey nearest you, call 1-800-906-9887 or visit the IRS Get Free Tax Prep Help page. You will be prompted to enter your zip code, and the locator will provide you with a list of VITA sites in your area.

Free Assisted Self-Help Tax Preparation (FAST Program). FAST combines the IRS Free File Program with VITA sites and can be a good way for people to prepare their own tax returns with some on-site personal assistance. Some VITA sites now make computer terminals available to taxpayers who can prepare their own taxes at no cost using free tax preparation software. VITA site volunteers are available to answer questions the taxpayer may have or help them use the software. Two FAST sites are currently open in New Jersey:

HOPES INC.
301 Garden Street
Hoboken, NJ 07030

Newark NOW
103 Bloomfield Ave.
Newark, NJ 07104

AARP Tax-Aide. AARP also sponsors free tax-preparation services for people with low and moderate incomes. There is no age limitation, but special attention is provided to people age 60 and older. For more information about the Tax Aide program or to find a site near you, go to AARP Tax-Aide New Jersey or call 1-888-AARPNOW.

Tax Counseling for the Elderly (TCE). The TCE program provides free tax preparation to people age 60 and older. For more information on TCE, call 1-800-829-1040.

Armed Forces Tax Council (AFTC). The AFTC coordinates tax programs for the Army, Air Force, Navy, Marine Corps, and Coast Guard and oversees the operation of the military tax programs worldwide. The IRS works with the AFTC in advance of military deployments to help address tax issues and filing concerns. Military members and their families worldwide can receive free tax preparation assistance at designated centers. Staff in these offices are trained to handle military-specific tax issues, such as combat zone tax benefits. Check with your local installation to see if they sponsor a free tax preparation program.


Free Help with a Federal Tax Matter
Tax Legal Assistance Project (TLAP)

Legal Services of New Jersey’s Tax Legal Assistance Project (TLAP) may be able to assist you if you receive a letter or notice from the IRS challenging items on your tax return. TLAP may also help you with IRS collection matters. TLAP represents low-income individuals in legal disputes with the IRS. TLAP does not prepare tax returns. If you have a tax problem and want to see whether you are eligible for representation, call LSNJ-LAW™, Legal Services of New Jersey’s statewide, toll-free legal hotline, at 1-888-LSNJ-LAW (1-888-576-5529). Tell the person who answers the telephone that you have a tax problem. All potential clients are screened for eligibility, and representation is not guaranteed. You may also apply online.

The tax project is not part of the Internal Revenue Service or the United States Tax Court.

This article is from the January-February 2012 issue of Looking Out for Your Legal Rights®.

 

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