Brian Borawski CPA, PC

Archive for July, 2012

In their summertime tax tip series, the Internal Revenue Service recently issued guidance to those people who adopted a child recently yet also extended their 2011 tax return.  According to the report, there’s eight things you need to know.

1. The adoption credit for tax year 2011 can be as much as $13,360 for each effort to adopt an eligible child. You may qualify for the credit if you adopted or attempted to adopt a child in 2010 or 2011 and paid qualified expenses relating to the adoption.

2. You may be able to claim the credit even if the adoption does not become final. If you adopt a special needs child, you may qualify for the full amount of the adoption credit even if you paid few or no adoption-related expenses.

3. The credit for qualified adoption expenses is subject to income limitations, and may be reduced or eliminated depending on your income.

4. Qualified adoption expenses are reasonable and necessary expenses directly related to the legal adoption of the child who is under 18 years old, or physically or mentally incapable of caring for himself or herself. These expenses may include adoption fees, court costs, attorney fees and travel expenses.

5. To claim the credit, you must file a paper tax return and Form 8839, Qualified Adoption Expenses, and attach all supporting documents to your return. Documents may include a final adoption decree, placement agreement from an authorized agency, court documents and the state’s determination for special needs children. You can use IRS Free File to prepare your return, but it must be printed and mailed to the IRS. Failure to include required documents will delay your refund.

6. If you filed your tax returns for 2010 or 2011 and did not claim an allowable adoption credit, you can file an amended return to get a refund. Use Form 1040X, Amended U.S. Individual Income Tax Return, along with Form 8839 and the required documents to claim the credit. You generally must file Form 1040X to claim a refund within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later.

7. The IRS is committed to processing adoption credit claims quickly, but must also safeguard against improper claims by ensuring the standards for receiving the credit are met. If your return is selected for review, please keep in mind that it is necessary for the IRS to verify that the legal criteria are met before the credit can be paid. If you are owed a refund beyond the adoption credit, you will still receive that part of your refund while the review is being conducted.

8. The expanded adoption credit provisions available in 2010 and 2011 do not apply in later years. In 2012 the maximum credit decreases to $12,650 per child and the credit is no longer refundable. A nonrefundable credit can reduce your tax, but any excess is not refunded to you.

If you know someone serving in the armed forces and is helping protect our country, like everyone, they have to file a tax return.  While most of the regular rules apply to those serving in the military there are a couple of things that those in the Armed Forces have to look out for.  Most of those special situations are discussed in Publication 3, the Armed Forces’ Tax Guide.  Rather then letting you read the 30 page publication, here are some of the highlights.

1)  People in the armed forces have several income types that are excluded from gross income.  Combat zone pay, your Basic Allowance for Housing (BAH) and your Basic Allowance for Subsistence (BAS) are all excluded from your taxable income as are moving allowances and travel allowances.

2)  There’s a combat zone exclusion.  If you’re serving in a combat zone, you can exclude certain pay from your income.  If you qualify for the earned income credit, you can choose to include your combat pay in your income and include it for purposes of the earned income credit.

3)  While grim to talk about it, a decedent can have their tax liability forgiven if they served and passed while in active service in a combat zone.  This can go back multiple years and you’ll need to amend prior years’ tax returns to take advantage of it.

4)  The normal deadlines don’t necessarily apply.  If you serve in a combat zone or you’re away from your permanent duty station you may qualify for an extension of the normal tax deadline.  Your extension of the deadline is 180 days after the later of either the last day you are in a combat zone or the last day of any continuous qualified hospitalization.  You can also add the number of days to the 180 that you would have had when you entered the combat zone as well.

5)  Similarly, you can defer any payment tax under many of the same rules in number four.  In this case you have to notify the IRS that your ability to pay the income tax has been materially affected by your military service.

6)  If you’re overseas, there are additional rules that might let you exclude some or all of your income from tax.  This isn’t covered in Publication 3.

For more information, the IRS has a resources page on their website.  There’s a couple of videos and several links (including one to Pub 3) to help you out.

While I’m still putting some finishing touches on my “About Me” page, you can still find a few things about me because I was highlighted on Taxgirl’s “Getting to you know Tuesday.”  Be sure to check it out and when my About Me page is done, I’ll let everyone know.

When you’re starting a business, be careful what you do with your start up costs.  Costs that you think would normally be deductible may not be and this is all because of Code Section 195.  Start up costs fall into one of three categories…

1)  costs incurred in investigating the creation or acquisition of a business
2)  costs incurred in creating an active trade or business and
3)  any activity engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of that activity becoming an active trade or business.

If your costs fall into one of these two categories, then the IRS gives you two choices.  You can fully capitalize the costs which means you get no deduction and the costs are rolled into the basis of your business.  Option two lets you amortize the costs over 15 years although there is a provision for costs incurred after 2004 that allows you to expense the first $5,000 in costs (although if you have more then $50,000 in costs, then the amount you expense is reduced dollar for dollar for the amount that exceeds $50,000.  Fifteen years is a long time so be sure to consult with a professional to make sure you’re classifying your costs correctly.

It looks like the IRS isn’t happy with the level of compliance with US citizens who go overseas to work.  They’ve offered a special deal to certain overseas taxpayers that would allow them to escape penalties if they file their back tax returns.  This also applies to Reports of Foreign Bank and Financial Accounts.  The returns that are safe-harbored in are those where tax due is $1,500 or less and it requires you file three years of tax returns and six years of Reports of Foreign Bank and Financial Accounts.