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FREE TAX HELP FOR THE MILITARY

If you, or your spouse, are a member of the military, you may be eligible to receive free assistance with the preparation and filing of your federal tax return. The U.S. Armed Forces participate in the Volunteer Income Tax Assistance Program. The Armed Forces Tax Council oversees the operation of the military tax programs worldwide, and serves as the main conduit for outreach by the IRS to military personnel and their families. The AFTC consists of tax program coordinators for the Marine Corps, Air Force, Army, Navy and Coast Guard.

Military-based VITA sites provide free tax advice, tax preparation, return filing and other tax assistance to military members and their families. The volunteer assistors are trained to address military-specific tax issues, such as combat zone tax benefits.

Military commanders support the program by detailing members of the military to prepare returns and by providing space and equipment for tax centers. The IRS supports these efforts by providing tax software and training.

To receive this free assistance, you should bring the following records to your military VITA site:

• Valid photo identification
• Social Security cards for you, your spouse and dependents or a social security number verification letter issued by the Social Security Administration
• Birth dates for you, your spouse and dependents
• Current year’s tax package, if you received one
• Wage and earning statement(s) — Form W-2, W-2G, 1099-R
• Interest and dividend statements (Forms 1099)
• A copy of last year’s federal and state tax returns, if available
• Bank routing numbers and account numbers for direct deposit
• Total amount paid for day care
• Day care provider’s identifying number
• Other relevant information about income and expenses

If your filing status is Married Filing Jointly and you wish to file your tax return electronically, both you and your spouse should be present to sign the required forms. If it isn’t possible for both to be present, a valid power of attorney that allows tax preparation can be used to sign and file the return.

For more information, review IRS Publication 3, Armed Forces’ Tax Guide, available on the IRS Web site at IRS.gov or order a free copy by calling 800-TAX-FORM (800-829-3676).

GIFT TAXES

If you gave any one person gifts in 2006 that valued at more than $12,000, you must report the total gifts to the Internal Revenue Service and may have to pay tax on the gifts. 

The person who receives your gift does not have to report the gift to the IRS or pay gift or income tax on its value.

Gifts include money and property, including the use of property without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift.

There are some exceptions to the tax rules on gifts. The following gifts do not count against the annual limit:

• Tuition or Medical Expenses that you pay directly to an educational or medical institution for someone’s benefit
• Gifts to your Spouse
• Gifts to a Political Organization for its use
• Gifts to Charities

If you are married, both you and your spouse can give separate gifts of up to the annual limit to the same person without making a taxable gift.

For more information, get the IRS Publication 950, Introduction to Estate and Gift Taxes, IRS Form 709, United States Gift Tax Return, and Instructions for Form 709. They are available at the IRS Web site at IRS.gov in the Forms and Publications section or by calling 800-TAX-FORM (800-829-3676).

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TAX RATES FOR A CHILD’S INVESTMENT INCOME

Part or all of a child’s investment income may be taxed at the parent’s rate rather than the child’s rate. Because a parent’s taxable income is usually higher than a child’s income, the parent’s top tax rate will often be higher as well.

This special method of figuring the federal income tax only applies to children who are under the age of 18. For 2006, it applies if the child’s total investment income for the year was more than $1,700. Investment income includes interest, dividends, capital gains, and other unearned income.

To figure the child’s tax using this method, fill out Form 8615, Tax for Children Under Age 18 With Investment Income of More Than $1,700, and attach it to the child’s federal income tax return. 

Alternatively, a parent can, in many cases, choose to report the child’s investment income on the parent’s own tax return. Generally speaking, this option is available if the child’s income consists entirely of interest and dividends (including capital gain distributions) and the amount received is less than $8,500.  However, choosing this option may reduce certain credits or deductions that parents may claim.

These special tax rules do not apply to investment income received by children who are age 14 and over. In addition, wages and other earned income received by a child of any age are taxed at the child’s normal rate.

More information can be found in IRS Publication 929, Tax Rules for Children and Dependents. This publication and Form 8615 are available on the IRS Web site at IRS.gov in the Forms and Publications section. You may also order them by calling the IRS at 800-TAX-FORM (800-829-3676).

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INCOME FROM FOREIGN SOURCES

Many United States citizens earn money from foreign sources. These taxpayers must remember that they must report all such income on their tax return, unless it is exempt under federal law.

U.S. citizens are taxed on their worldwide income. This applies whether a person lives inside or outside the United States. The foreign income rule also applies regardless of whether or not the person receives a Form W-2, Wage and Tax Statement, or a Form 1099 (information return).

Foreign source income includes earned and unearned income, such as:

• Wages and tips
• Interest
• Dividends
• Capital Gains
• Pensions
• Rents
• Royalties

An important point to remember is that citizens living outside the U.S. may be able to exclude up to $82,400 of their 2006 foreign source income if they meet certain requirements. However, the exclusion does not apply to payments made by the U.S. government to its civilian or military employees living outside the U.S.  

For more information, check out IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. It’s available on the IRS Web site at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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TAXES ON EARLY DISTRIBUTIONS FROM RETIREMENT PLANS

Payments that you receive from your IRA or qualified retirement plan before you reach age 59½ are normally called ‘early’ or ‘premature’ distributions. These funds are subject to an additional 10 percent tax and must be reported to the IRS.

There are a number of exceptions to the age 59½ rule if you make an early withdrawal. Some exceptions apply only to IRAs, some only to qualified retirement plans, and some to both.

In addition to the 10 percent tax on early distributions, you generally must include the distribution in your income. If you received a distribution from an IRA, other than a Roth IRA, to which you made any nondeductible contributions, the portion of the distribution attributable to those contributions is not taxed. If you received a qualified distribution from a Roth IRA, none of the distribution is taxed.  If you received a distribution from any other qualified retirement plan, the portion of the distribution attributable to your cost, not including pre-tax contributions, is not taxed.

A ‘rollover” is a way to avoid paying tax on early distributions. Generally, a rollover is a tax-free transfer of cash or other assets from an IRA or qualified retirement plan to another eligible retirement plan. An eligible retirement plan is a traditional IRA, a qualified retirement plan, or a qualified annuity plan. You must complete the rollover within 60 days after the day you received the distribution. The amount you roll over is generally taxed when the new plan pays you or your beneficiary.

For more information see IRS Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans), Publication 575, Pension and Annuity Income, or Publication 590, Individual Retirement Arrangements (IRAs), available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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TAX FACTS ABOUT CAPITAL GAINS AND LOSSES

Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. When you sell a capital asset, the difference between the amounts you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss. While you must report all capital gains, you may deduct only capital losses on investment property, not personal property.

Here are a few tax facts about capital gains and losses:

• Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040.
• Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
• Net capital gain is the amount by which your net long-term capital gain is more than your net short-term capital loss.
• The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income and are called the maximum capital gains rates. For 2006, the maximum capital gains rates are 5%, 15%, 25% or 28%.
• If your capital losses exceed your capital gains, the excess is subtracted from other income on your tax return, up to an annual limit of $3,000 ($1,500 if you are married filing separately).

For more information about reporting capital gains and losses, get Publication 17, Your Federal Income Tax, and Publication 550, Investment Income and Expenses, available on the IRS Web site at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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GAMBLING INCOME AND LOSSES

Gambling winnings are fully taxable and must be reported on your tax return. Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse and dog races and casinos, as well as the fair market value of prizes such as cars, houses, trips or other noncash prizes.

Depending on the type and amount of your winnings, the payer might provide you with a Form W-2G and may have withheld federal income taxes from the payment.

Here are some general guidelines on gambling income and losses:

• Reporting winnings: The full amount of your gambling winnings for the year must be reported on line 21, Form 1040. You may not use Form 1040A or 1040EZ.
• Deducting losses:  If you itemize deductions, you can deduct your gambling losses for the year on line 27, Schedule A (Form 1040). You cannot deduct gambling losses that are more than your winnings.

It is important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses.

For more information see IRS Publication 529, Miscellaneous Deductions, or Publication 525, Taxable and Nontaxable Income, both available on the IRS Web site, IRS.gov, or by calling 800-TAX-FORM (800-829-3676).
 

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TIPS ARE SUBJECT TO TAXES

Do you work at a hair salon, barber shop, casino, golf course, hotel or restaurant or drive a taxicab? The tip income you receive as an employee from those and other services is taxable income.

Here are some tips about tips:

• Tips are taxable. Tips are subject to federal income, Social Security and Medicare taxes, and may be subject to state income tax as well.  The value of non–cash tips, such as tickets, passes or other items of value, is also income and subject to federal income tax.
• Include tips on your tax return. You must include in gross income all cash tips you receive directly from customers, tips added to credit cards, and your share of any tips you receive under a tip–splitting arrangement with fellow employees.
• Report tips to your employer. If you receive $20 or more in tips in any one month, you should report all your tips to your employer. Your employer is required to withhold federal income, Social Security and Medicare taxes.
• Keep a running daily log of your tip income. You can use IRS Publication 1244, Employee’s Daily Record of Tips and Report to Employer, to record your tip income. For a free copy of Publication 1244, call the IRS toll free at 800-TAX-FORM (800-829-3676).

For more information, check out IRS Publication 531, Reporting Tip Income, or Publication 3148, Tips on Tips.  They are available by calling 800-TAX-FORM (800-829-3676) or by going to the IRS Web site at IRS.gov.

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PAYING OR RECEIVING ALIMONY?

If you were recently divorced and are paying or receiving alimony under a divorce decree or agreement, you need to consider the tax implication for your 2006 federal income tax return.

Here are the general guidelines:

• Alimony payments received from your spouse or former spouse are taxable to you in the year you receive them. Because no taxes are withheld from alimony payments, you may need to make estimated tax payments or increase the amount withheld from your paycheck.
• Alimony payments you make under a divorce or separation instrument are deductible if certain requirements are met. Any payments not required by such a decree or agreement do not qualify as deductible alimony payments.
• Child support is never deductible. If your divorce decree or other written instrument or agreement calls for alimony and child support, and you pay less than the total required, the payments apply first to child support. Any remaining amount is then considered alimony.

If you paid or received alimony you must use Form 1040. You cannot use Form 1040A or Form 1040EZ. If you received alimony, you must give the person who paid the alimony your social security number or you may have to pay a $50 penalty.

For more information, including rules for divorces and separations before 1985, get Publication 504, Divorced or Separated Individuals, available on the IRS Web site at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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