Now that season has officially started, tax professionals across the country are being asked to offer tips to people paying taxes at a time when most are still feeling the effects of the last recession. Naturally experts, like CPAs and enrolled agents, are emphasizing benefits and deductions that aim to make paying one’s taxes less painful. This process also entails understanding how to successfully claim these deductions. Since an enrolled agent is required to take continuing education tax courses as part of the EA certification and the EA license processes, this group of tax professionals is highly knowledgeable in all issues of taxation, and is therefore especially qualified to dish out advice, especially at a time when every penny saved counts.
Two topics that have received a great deal of attention this tax season, and that have been added to most tax CPE courses are the Making Work Pay Credit and tip income. As tax professional educate clients on these two scenarios, they should pay close attention to several details.
Important Facts about the Making Work Pay Credit
Starting this year, a good number of working taxpayers are eligible for the Making Work Pay Tax Credit, which is based on earned income and is claimed on the 2010 tax return that is with 2011 taxes. The IRS has been very clear to tax professionals about understanding the following five things about this tax credit so that they can ensure their clients receive the entire amount for which they are eligible:
(1) This credit offers a refundable tax credit of up to $400 for individuals and up to $800 for married taxpayers filing joint returns.
(2) Most workers received this credit through larger paychecks, a trend indicative of reduced federal income tax withholding during 2010.
(3) Taxpayers filing Form 1040 or 1040A must use Schedule Mto figure the credit. Completing Schedule M will ensure taxpayers determine whether they have already received the full credit in their paycheck or are due even more money because of the credit.
(4) Taxpayers filing Form 1040-EZ should use the worksheet for Line 8 on the reverse of the 1040-EZ to calculate the credit.
(5) Taxpayers cannot take the credit if the modified adjusted gross income is $95,000 for individuals or $190,000 if married.
Four Tax Tips about Tip Income
In recent years the IRS has demonstrated a greater willingness to crack down on tax violations committed by people who work in service industries like food and hotel services. As a result, taxpayers who work in occupations where tips are considered part of the total compensation must be mindful of several facts related to federal income taxes. Tax professionals hired by individuals in this category should clearly communicate the following four facts the IRS wants people to understand about tip income:
(1) Tips are taxable. Tips are subject to federal income, Social Security and Medicare taxes. The value of non-cash tips-like tickets, passes or other tangible valuables-is also defined by the IRS as income and subject to tax.
(2) Include tips on tax return. Gross income includes all cash tips receive directly from customers, tips added to credit cards, and portions of tips received under a tip-splitting arrangement with other employees.
(3) Report tips to employer. If a taxpayer receives $20 or more in tips in any one month, all tips must be reported to the employer, who must in turn withhold federal income, Social Security and Medicare taxes.
(4) Keep logs of all tip income. Individuals should use IRS Publication 1244, Employee’s Daily Record of Tips and Report to Employer, to record tip income.
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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