When are social security benefits taxed?

Are you considering post-retirement employment? If you're collecting social security and thinking of returning to the work force, you may have questions about the effect of that income on the taxability of your benefits.

The answer: Under current law, part of your social security benefits may be taxable. How much? The basic rule is that up to 85% of your annual benefits can be subject to federal income tax when your "provisional" income exceeds specified thresholds. Generally speaking, provisional income is the sum of your adjusted gross income plus tax-exempt interest and one-half of your social security benefits.

Benefits are not taxed when your provisional income is below the threshold applicable to your filing status.

The federal thresholds, called base amounts, range from zero, if you're married filing separately and live with your spouse all year, to $32,000, if you're married filing jointly.

A $25,000 base applies when you file as single, head of household, or as a qualifying widow or widower with a dependent child. If you're married, but file separately and do not live with your spouse during the year, you'll also use the $25,000 figure.

Illustration: When you're married, file a joint return, and your provisional income exceeds $32,000, a portion of your benefits will be taxed.

Please call us to discuss how income from a new business venture or job will impact your taxes. We'll be happy to help with planning moves, such as the timing of retirement account distributions, that can ease the tax bite.

Animal-rescue volunteers win tax deduction case

If you provide care for stray or feral animals in your home for an IRS-approved charity, you may be able to take a tax deduction for your out-of-pocket expenses. A recent U.S. Tax Court judge ruled that a taxpayer who fostered feral and stray cats in her home could deduct amounts she spent for food, veterinarian bills, litter, and other unreimbursed expenses incurred to help the animal charity in its mission. To be deductible, the taxpayer must keep records of the expenses, and the charity must provide a written acknowledgment of the volunteer work as a charitable gift.

The Humane Society hopes to get the word out on this case, stating that thousands of members do volunteer work such as this and spend their own money to support the mission of local shelters and rescue groups.

IRS warns about e-mail and phone scams

The IRS is warning taxpayers not to respond to e-mails and phone calls they may receive which claim to come from the IRS or another federal agency. Such contacts are likely to be scams whose purpose is to obtain personal and financial information from taxpayers – information that is then used by the scammers to commit identity theft.

Typically, the scam e-mail or phone call states that the IRS needs certain information to process a tax return or refund. The e-mail contains links or attachments to what appears to be the IRS website or an IRS form. Though they appear genuine, these phonies are designed to get from taxpayers the information scammers need to steal identities. The links can even download malicious software onto the taxpayer's computer if clicked. The software is often designed to search out and send to the scammer personal and financial information contained on the taxpayer's computer that the scammer uses to commit identity theft.

The IRS reminds taxpayers that it does not send unsolicited e-mails asking for sensitive personal and financial information.

Do you owe the "nanny tax"?

If you had a housekeeper, nanny, gardener, or other household worker help out in 2010, you may have payroll tax obligations (commonly called the "nanny tax"). These payroll taxes apply if you paid a household worker $1,700 or more in 2010, and filing requirements must be met by January 31, 2011. For assistance, call our office.

New tax law will delay processing of 2010 returns

The IRS has announced that it will take until mid to late February before its computers will be able to process certain income tax returns for 2010.

Individual income tax returns that (1) include Schedule A for itemized deductions, (2) claim a deduction for higher education expenses, (3) claim a deduction for educator expenses, or (4) claim a deduction for state and local sales taxes, will not be processed until the computers have been reprogrammed, which is estimated to be completed sometime in February.

This delay affects both paper and electronic filers. The IRS will announce a specific date when it will start processing tax returns impacted by the recent tax law changes. All other tax returns will be processed on the normal schedule as in past years.

IRS eliminates paper coupons for tax deposits

In December 2010, the IRS announced new regulations that effective January 1, 2011, all Federal Tax Deposits must be made using the Electronic Federal Tax Payment System (EFTPS).

The paper coupon system will no longer be available. However, taxpayers who owe minimal amounts may still send their payment along with their tax return. For example, a Form 941 filer that owes less than $2,500 can submit payment with the return or choose to use EFTPS. The minimal amount that permits payment with a return varies with the type of tax. Please contact our office if you need assistance.

2011 tax numbers are adjusted for inflation

Adjusting numbers in the federal income tax code to account for inflation, known as indexing, is an annual event. Indexing affects deductions, exemptions, exclusions, tax brackets - and your tax planning.

Here are selected changes to keep in mind as you review tax strategies for 2011.

* Personal exemptions will increase by $50 to $3,700. You can subtract that amount from your adjusted gross income for yourself, your spouse, and any dependents. In addition, there is no phase-out or reduction in personal exemptions for 2011, no matter how much income you have.

* The basic standard deduction is $11,600 when you're married and file a joint return. If you're single or married filing separately, the standard deduction is $5,800. Additional standard deductions are available for age and/or blindness. Note: The extra standard deduction for real estate taxes is not available for 2011.

* The kiddie tax threshold for 2011 is $1,900. That's how much investment income your child under age 19 (under age 24 for students) can earn before the income is taxed at your highest rate.

* The traditional and Roth IRA contribution limit is $5,000. You can contribute an additional $1,000 if you'll be age 50 or older by the end of the year.

* The annual gift tax exclusion is $13,000 ($26,000 when you elect to split gifts with your spouse).

* Standard mileage rates go up slightly. You can deduct 51¢ for each mile you drive your car for business purposes. The per-mile rate for calculating a charitable deduction is 14¢, and medical and moving mileage is deductible at a rate of 19¢.

Many other items are subject to indexing. In addition, some important figures, such as the alternative minimum tax exemption, are adjusted by Congress. Please contact us for additional information.