TaxHawk.com's Tax Tips

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Tip #101
Tax Refunds
If you e-file your tax return and choose to direct deposit your refund, you will typically receive your refund in 10 to 16 days. If you e-file and did not choose direct deposit or if your direct deposit information was inaccurate, you will typically receive your refund check within three weeks. If you mailed in your tax return instead of e-filing, you will typically receive your refund in six to eight weeks. To check on the status of your refund you can go to www.irs.gov and click on Where's My Refund? link or you can call the IRS Refund Hotline at (800) 829-1954. It takes about 7 days after you e-file or 4 to 6 weeks after you filed a paper return for your refund information to be available on the IRS systems. You should have a copy of your tax return in front of you when you inquire about your refund since you need to know the Social Security Number, Filing Status and refund amount to have access to your tax refund information.

Tip #102
401(k) Loans
Taking an early distribution subject to the 10% penalty from your 401(k) or other retirement plan is almost always a bad idea since you pay a lot of taxes and penalties on that distribution. One alternative to taking an early distribution may be to take a loan from your 401(k) or retirement plan. Not all retirement plans offer this option, but if they do then you can borrow part of your retirement plan money and pay it back over time. You pay interest on the 401(k) loan, but the interest goes into your 401(k) account so you are basically paying interest to yourself. There are a couple of negative things about 401(k) loans. First, if you leave your job before you are finished paying back the loan, you will need to pay back the rest of the loan or the remaining loan will be treated as an early distribution subject to the 10% penalty. Second, even though you are paying interest to yourself on the loan, you have taken money out that is no longer in the stock market, so if the stock market is providing a better return on investment than the interest you are paying, you are losing out. But even with these negatives, a 401(k) loan is absolutely better than taking an early distribution.

Tip #103
Tax Fraud
If you know about a tax fraud being committed, you can notify the IRS by completing Form 3949-A which can be downloaded from the IRS web site, www.irs.gov. You can remain anonymous to the IRS by simply not filling in your contact information on Line 6 of the Form 3949-A. The IRS does not require your contact information to be filled out to investigate a claim.

Tip #104
Workers Comp
Workers' Compensation you receive for occupational injuries or sickness is not taxable income and isn't reported on your tax return. Other types of injury or sickness benefits are usually not taxable too, but you would need to look into your specific set of circumstances to determine the taxability.

Tip #105
SUV
If you own a profitable business, you may be able to get a tax break by purchasing an SUV that weighs over 6,000 lbs that qualifies for the exception to the automobile depreciation limits. If your SUV qualifies, you are able to take a lot more depreciation on your vehicle or even possibly have a Section 179 deduction for the full amount of the SUV purchase price in the year you bought it. If your business isn't profitable, the extra depreciation is probably not going to help you and you won't be able to Section 179 the vehicle.

Tip #106
National Guard
National Guard members or Armed Forces Reservists who travel over 100 miles away from home for drills or meetings can deduct their unreimbursed travel expenses as an adjustment to income on page 1 of the Form 1040. Allowable expenses include meals, lodging, and automobile expense. For automobile expense, the standard mileage rate for 2006 is 44.5 cents per mile. The amount of the allowable expenses cannot exceed the per diem rates that federal government employees receive for travel expenses.

Tip #107
Charitable Events
If you attend a charitable benefit or event for a qualified charitable organization, you can deduct the amount you pay that is more than the fair market value of the event attended. For example, if you attend a charitable dinner event where the ticket is $100, but the value of the meal would have been $20 at a restaurant, you can deduct $80 as a cash charitable contribution.

Tip #108
College Sports Tickets
If you make a contribution to a college or university and receive the right to buy preferential seating tickets, you can deduct 80% of the payment as a charitable contribution. If you receive tickets for the payment, the value of the tickets is not deductible. For example, you belong to a university booster program and pay an annual membership fee of $1,000. Your membership entitles you to buy two football season tickets in a preferential designated area of the stadium. You can deduct $800 of the membership fee as a charitable contribution. If you automatically receive the two football season tickets when you pay the $1,000, then if the value of those tickets by themselves is $400, you can only deduct 80% of $600 which would be $480.

Tip #109
Support Test
One of the tests to determine whether you can claim a child over age 23 or a parent as a dependent on your tax return is if you provide over half of their support. If the adult child or parent lives with you, factor in the value of free rent when analyzing whether you provide over half their support. Determine what a person other than a relative would pay to be renting a room in your house than include that value in calculating whether you provide over half their support. There are other tests that have to be met besides the support test in determining whether you can claim your adult child or parent as a dependent so look at those tests also.

Tip #110
Care Provider ID
In order to claim the dependent care credit on your tax return, you will need to have your care provider's Social Security Number or Employer Identification Number. You don't need the care provider ID if a tax-exempt charitable organization provides your day care.

Tip #111
Ex-spouse incorrectly claims child
In a divorce situation, the custodial parent is the one who can claim a child as a dependent on their tax return unless the custodial parent has signed a written document allowing the other parent to claim the child. So if your child lives with you for seven months of the year and with your ex-spouse for five months of the year, you are the custodial parent. If your ex-spouse e-files his or her tax return before you do and incorrectly claims your child as a dependent, then when you e-file your return your tax return will be rejected by the IRS because the IRS records show your ex-spouse already having claimed your child. If that happens to you, file a paper return instead of e-filing and attach a note explaining your situation and why you are entitled to claim your child as a dependent. The same thing will need to be done if your ex-spouse incorrectly claims the earned income credit for your child and you are the one who should get the earned income credit. The earned income credit goes to the custodial parent even if the custodial parent has signed a written document allowing the other parent to claim the child as a dependent.

Tip #112
Combat Pay
Combat pay is tax-exempt and won't be on your tax return. However, Congress didn't want to take away the earned income credit and additional child tax credit for military members in combat situations. When calculating the earned income credit and additional child tax credits, a taxpayer with combat pay will include the combat pay as income just for purposes of these two credits. You calculate your earned income credit and additional child tax credit the regular way without including combat pay, then you calculate your earned income credit and additional child tax credit including your combat pay as income. Then you use the higher of the two calculations for your credits. For example, if the only income you have is combat pay and you have a child who is eligible for the earned income credit, you are going to receive a higher earned income credit by including your combat pay in the earned income credit calculation. If you have other sources of wages and the combat pay decreases the amount of earned income credit, then you would use the regular earned income credit calculation.

Tip #113
Foster Parents
Foster care payments are not taxable income unless you provide care to more than 5 individuals age 19 or older. In addition, if your foster care expenses exceed the foster care payments you receive, you can deduct the excess expenses as a cash charitable contribution on your Schedule A.

Tip #114
Health Savings Account
If you are covered by a high deductible health plan, you or your employer can set up a Health Savings Account (HSA). For 2006, the minimum deductible to be considered high deductible is $1,050 for self-coverage and $2,100 for family coverage. Contributions made by your employer to your HSA are excluded from your wages income. Contributions you make yourself to your HSA are deducted as an adjustment to income on page 1 of your Form 1040. Money that is not spent for medical costs stays in the account from year to year. Unlike cafeteria plans where unused health care money is forfeited at the end of the year, you don't have to use your HSA money during the year. The unused HSA money rolls forward from year to year and can be invested in stocks, bonds or other investments and the investments grow tax-deferred like an IRA. The unused HSA funds will be available for future health care costs.

Tip #115
Nontaxable Income
Don't overpay the IRS by including non-taxable income on your tax return. The following are some of the main non-taxable items of income: Life insurance proceeds, IRA rollovers and pension rollovers, child support payments, inheritances, gifts, workers comp, disability payments if you paid the premiums on the policy, damages for personal physical injuries, health and accident benefits, federal income tax refund, most scholarships and fellowships, most foster care payments, social security benefits if your income doesn't exceed the threshold, and most gains on the sale of your home.

Tip #116
Presidential Election Campaign Box
On the top of the Form 1040 there is a question that asks if you want to contribute $3 to the Presidential Election Campaign Fund. Whether or not you checkmark this box, it doesn't affect your tax return in any way. You will receive the same amount of refund or owe the same amount of taxes whether or not you checkmark the box. The $3 that goes to the Presidential Election Campaign Fund comes from a source other than your tax return.

Tip #117
Social Security Benefits and Wages
If you earn wages and draw social security benefits at the same time, it's not a problem if you have reached full retirement age. If you are younger than full retirement age and earn more wages than the annual limit, your social security benefits will be reduced based on your earnings above the annual limit. So if you are older than age 65 and 8 months, you don't need to worry about wages reducing your social security benefits.

Tip #118
Prizes
If you win a prize in a television or radio program, beauty contest, or other event, you must include it in your income. For example, if you win a $50 prize in a photography contest, you must report this income on Form 1040 page 1 on the Other Income line. If your prize is in goods or services such as winning a new car, the amount to include as income would be the fair market value of the prize. So you would find out how much it would cost to buy a similar product or service and use that as the value.

Tip #119
Court Awards
For court awards and damages, to determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the nature of the injury that caused the loss and the item which the settlement replaces. Examples of items that are considered ordinary income and must be included on your tax return include (1) interest on any award, (2) compensation for lost wages or lost profits in cases other than those where the payments are for wages lost as a result of physical injury, (3) punitive damages, and (4) attorney's fees.

Examples of nontaxable court awards are compensatory damages for personal physical injury or physical sickness and damages for emotional distress resulting from a physical injury or physical sickness.

Tip #120
Filing Requirement
In general, if your income is less than your personal exemptions and standard deduction, you don't need to file a tax return. You can look at the Form 1040 instructions for a table listing the gross income requirements for different filing statuses and scenarios. However, most people who don't need to file a tax return should file one anyway. If you had federal tax withheld from your paychecks or if you qualify for the earned income credit or additional child tax credit, you want to file a return even if you don't need to in order to get your tax refund. If you don't file your return, you won't get a refund.

Tip #121
Qualified Dividends
Qualified dividends are taxed at a lower rate than normal income. They are taxed at the lower capital gain rates. The amount of your qualified dividends will be shown on your Form 1099-DIV in box 1b. Qualified dividends are not separate taxable income, they are just a classification of regular dividends. For example, if your Form 1099-DIV box 1a shows $1,000 of ordinary dividends and Form 1099-DIV box 1b shows $400 of qualified dividends, you only show $1,000 of taxable dividend income on your tax return. You don't combine the two and show $1,400 of income. When you have qualified dividends, you don't use the tax tables to calculate your income tax. Instead you use the Qualified Dividends and Capital Gain Tax Worksheet from the Form 1040 instructions, or if you are filing a Schedule D, you use the Schedule D to calculate your income tax.

Tip #122
Preschool
Preschool and nursery school costs count as child care expenses for the child care credit. For students in first grade or above, the portion of any payments that are considered tuition are not eligible for the child care credit. But if part of the amounts you pay are for daycare for a first grader or above, then those amounts are eligible for the child care credit.

Tip #123
Schedule C Deductions
Make sure you have included every business related expense on your Schedule C. Every dollar of expense reduces not only your regular income tax but also the 15.3% self-employment tax if your business is profitable. For example if you are in the 25% tax bracket, if you find an extra $1,000 in business deductions, you save $403 in taxes. So scour through your checkbook and records to make sure you have included every business expense on your Schedule C. This is also a good reason to be organized and keep good tax records for your Schedule C business so that expenses don't slip through the cracks.

Tip #124
Hobby Losses
Hobby expenses are deductible only up to the amount of hobby income. The IRS may try to disallow your Schedule C business losses by claiming that your business is really a "hobby". Examples of businesses that the IRS may categorize as hobbies include breeding horses and gentleman farming. What you need to do to take the losses is show a "profit motive". If you treat your business like a business instead of as a hobby, then you will have a solid claim to take any losses on your tax return. Some ways to show that you have a profit motive include (1) keeping businesslike records and a separate business bank account, (2) putting time and effort into the business, (3) and consulting with knowledgeable advisors to develop a business plan.

Tip #125
Inherited Property
When you inherit property, stocks, or a home, the inherited property usually has a basis equal to the fair market value of the property on the date the individual passed away (not the deceased's basis in the property). There is an optional valuation that can be elected by the trustee of the estate, but if the optional valuation wasn't elected by the trustee, then you use the fair market value on the date of death. When you sell the inherited property it is treated as a long-term gain or loss even if you sell the property in less than one year after receiving it. EXAMPLE: Your grandfather owned a piece of real estate that on the date of his death was worth $100,000. His basis in the property was only $30,000, however, your basis in the inherited property will be $100,000.

Tip #126
Household Employees
Schedule H is used to report payroll taxes for household employee's wages. Schedule H needs to be filed if you answer yes to any of the following three questions: (1) Did you pay any one household employee cash wages of $1,400 or more in 2006? (2) Did you withhold Federal income tax during 2006 for any household employee? (3) Did you pay total cash wages of $1,000 or more in any calendar quarter of 2005 or 2006 to household employees?

You do not need to file Schedule H if the household help are employees of a company that specializes in household services such as "Molly Maids Inc.". In that case, the household employees are considered to be employees of the company and not your employees.

You don't have to pay Social Security or Medicare taxes on the wages of a household employee who is under the age of 18 and a student. You also do not have to pay Social Security or Medicare taxes for wages paid to your spouse, your child under age 21, or your parent (exception may apply to your parent).

Tip #127
Margin Interest
Investment interest expense such as margin interest is deductible on Schedule A up to the amount of your investment income less any other investment expenses deducted on Schedule A. Investment income includes dividends, interest income and royalties. Disallowed investment interest is carried forward to future years. Long-term capital gain isn't included in investment income for purposes of calculating the investment interest deduction, however, short-term gain is included in investment income. You can choose to report part or all of your long-term capital gain as short-term capital gain if you want to deduct more of your investment interest expense.

For example, if you have $10,000 in margin loan interest expense, $15,000 of long-term capital gain and $500 of dividend income, you can only deduct $500 of the margin interest expense on your current tax return. The other $9,500 in investment interest expense will carry forward to future years and can be deducted to the extent that you have investment income in the future. However, if you wanted to deduct the full $10,000 in the current year, you could choose to report $9,500 of your long-term capital gain as short-term capital gain. This allows you to deduct all $10,000 in investment interest expense in the current year. The disadvantage is that you don't get the reduced 20% tax rate for long-term capital gains. However, it is probably a good choice to make if your margin interest expenses are significantly more than your investment income so you will be unable to use much of the margin interest expense deduction in future years.

Tip #128
Kiddie Tax
If your child is under age 14 and has over $1,600 of unearned income (interest, dividends, capital gains, etc.) then part of their income will be subject to the "kiddie" tax. The kiddie tax is calculated on Form 8615 if your child files his or her own tax return and is calculated on Form 8814 if you report your child's income on your own tax return.

If your child has less than $800 in unearned income, then no tax return needs to be filed for the child and nothing need to be reported on your tax return. If your child has more than $800 in unearned income you can either report the child's income on your tax return by using Form 8814 or you can file a separate tax return for your child and use Form 8615. If you use Form 8814, your child will not have to file a return.

Filing a tax return for your child and using Form 8615 often saves more in overall taxes than using Form 8814. If you have items on your tax return that are affected by adjusted gross income such as IRA deductions and itemized deductions, then using Form 8814 and adding your child's income to your tax return could reduce your IRA deduction or itemized deductions.

Tip #129
IRS refund garnishment
Under the law, state and Federal agencies refer to the IRS the names of taxpayers who are behind in their child support payments, taxes, and government loans. Your tax refund may not be refunded to you if you are delinquent in child support payments or you have a past due Federal debt (such as a student loan). If you are married and only one spouse owes past due federal tax, past-due child support, a federal debt, or state income tax, the other spouse can be considered an injured spouse and can request his or her share of the joint refund. If this situation applies to you, file Form 8379, Injured Spouse Claim and Allocation, to recover your share of the joint refund.

Tip #130
Child Care from Relatives
If you pay your parents, adult child, or any other relative to watch your children while you are at work, those expenses are qualified child care expenses and can be used for the child care credit. The person can't be a dependent on your tax return and must be age 19 or older. Your parents or whoever you pay for the child care will need to pick up the payments as income on their tax return.

Tip #131
Advance EIC
If you are short on cash and you are expecting to get an Earned Income Credit when you file your tax return next year, you can fill out Form W-5 and give it to your employer to receive an advance EIC. You are only eligible if you have a qualifying child for the Earned Income Credit. If you don't have kids but your income is low enough to receive the EIC, you aren't eligible for the advance EIC. The way it works is that your employer gives you a portion of your EIC throughout the year in your pay checks. Your employer will report your total advance EIC payments made to you in Box 9 of your W-2. Then when you file your tax return, you calculate your Earned Income Credit like normal, but you enter the amount of your advance EIC payments on page 2 of the Form 1040 and that reduces your tax refund by the amount of advance EIC you received. Form W-5 can be downloaded from the IRS web site, www.irs.gov.

Tip #132
Don't gift stocks that have lost value
If you have a stock that has lost value since you purchased it, don't gift it to your kids or grandkids. Instead, sell the stock so you can take the loss on your tax return and gift the cash to whoever you want to make the gift to. If you give a gift of stock or other property that has lost value, the person who receives the gift can't deduct the losses on their tax return when they sell the stock. The loss just disappears forever. For example, if you have 100 shares of XYZ stock that you purchase for $8,000 five years ago and it is only worth $5,000 now, then if you gift the stock to a grandchild and your grandchild turns around and sells the stock for $5,000, nobody gets a tax deduction. You can't take a $3,000 loss on your tax return and your grandchild can't take the loss on their tax return either.

Tip #133
Don't Make Death Bed Gifts
If you have appreciated assets such as rental properties, your home, or stocks, for tax purposes it is better to leave your appreciated assets as an inheritance to your kids or grandkids rather than gifting them. The cost basis of inherited assets is the fair market value of the property on the date of death. The cost basis of gifted assets is usually the same cost basis that the giver has. For example, if you have 300 shares of ABC stock that you purchased for $5,000 twenty years ago and that are now worth $40,000. If you gift the ABC stock to a grandchild, then your grandchild's cost basis in the stock will be $5,000. If your grandchild receives the ABC stock as an inheritance and the ABC stock has a value of $40,000 on the date of death, then your grandchild's cost basis in the stock will be $40,000.

Tip #134
Don't Donate Loss Stocks
Don't donate a stock that has lost value to a church or charity. If you donate stock that has lost value, you won't get the benefit of the stock loss on your tax return and neither will the charity. Instead, sell the stock and donate the cash to the charity. You will then get the benefit of the capital loss as well as the benefit of the charitable deduction on your tax return. For example, if you have DEF stock that you purchased for $20,000 three years ago but which now is only worth $14,000. If you sell the stock and donate the $14,000 cash to your church, then you will get a $6,000 capital loss and a $14,000 charitable contribution on your tax return. If you donate the stock directly to your church you will only get a $14,000 charitable contribution on your tax return.

Tip #135
Stock Splits
When you receive stock in a stock split, there's nothing you need to report on your tax return if you don't sell any of the stock. You divide up your cost basis of the old stock to the new stock received in the stock split. The date acquired for the new stock is the same as the old stock. For example, if before the split you have 100 shares of ABC Company that you purchased on May 10, 2002 with a cost basis of $5,000 then each share had a cost basis of $50. If ABC Company does a 2 for 1 stock split and you end up with 200 shares of ABC Company, then your overall cost basis is still $5,000 and each share of ABC Company has a cost basis of $25. The date acquired for all 200 shares remains May 10, 2002. If you sell 10 shares of ABC Company stock that same year, then your cost basis in the 10 shares sold that you report on your Schedule D is $250 and the purchase date of the stock is May 10, 2002.

Tip #136
Sale of Stocks or Mutual Funds Acquired Through Reinvested Dividends
If you've been holding a stock or mutual fund where your dividends have been automatically reinvested into more stock or mutual fund shares, it's tricky to come up with the cost basis when you sell that stock or mutual fund. If you have all of the stock or mutual fund records such as quarterly or yearly statements that show the amount of dividends and the stock purchased with those dividends, then do a spreadsheet listing all of the dividends and the stock purchased with the reinvested dividends. If those records aren't available, you might be able to reconstruct at least the overall cost basis by looking at your old tax returns and viewing the amount of dividends for that stock on Schedule B of the old tax returns. If you have sold all of your reinvested dividend stock, the easiest way to report the sale is to group the reinvested dividend stock for a single company into two groups and report it as two transactions on your Schedule D. The first would show all the reinvested dividend stock that was held for more than a year and will be treated as long-term gain or loss. Put down "Various" as the purchase date for the stock. The second entry on Schedule D will show the reinvested dividend stock for a single company that was held for less than a year and will be treated as short-term gain or loss. Also, put down "Various" as the purchase date.

Tip #137
Single Member LLC
A limited liability company (LLC) helps to limit your personal liability without having to form a corporation. If you are the only owner of the LLC, you report your company's income and expenses on Schedule C just like you would if you hadn't done an LLC. If there are two or more owners of the LLC, you file the companies tax return as a partnership on Form 1065 and your portion of income and losses is reported on a K-1. So if you are a sole proprietor who is filing a Schedule C already, it probably makes sense to look into becoming a Single Member LLC for liability protection since there is very little additional paperwork involved with the LLC and you can continue filing your business income and expenses on a Schedule C.

Tip #138
Don't mess with payroll taxes
If you are a business owner, make sure you always file your payroll tax reports and pay the payroll tax withheld. You might want to use a payroll service such as ADP or PayChex to make sure your payroll taxes get taken care of in a timely manner. If your business is strapped for cash, never dip into the payroll taxes withheld. The IRS is vicious when it comes to payroll taxes and will assess steep penalties and even shut your business down if you fall behind on payroll taxes. Plus if you go out of business, the payroll taxes are still owed by you personally even if your business was a corporation or LLC and the IRS can seize any of your personal assets to take care of the payroll tax liability. The IRS is much easier to work with if you owe income taxes than payroll taxes. If you are dipping into payroll tax withholding, you are basically stealing your employees' social security and medicare taxes and the IRS would rather put you out of business than let you continue to steal your employees' payroll taxes.

Tip #139
Sell Mutual Funds before Dividends are Paid
If you are planning on selling mutual fund shares, you will probably come out better tax wise if you sell before the mutual fund pays out a dividend. If you sell the stock before the dividends are paid, more of your gain from the investment will be capital gains potentially subject to lower tax rates than dividend income taxed at your regular tax rates.

Tip #140
Employing Your Children
If you own a business, you can hire your children to do legitimate services for you such as office work or maintenance. Pay them a reasonable wage, keep records, and give them a W-2 at the end of the year. If your child is younger than age 18, you don't have to pay any social security or medicare taxes on your child's wages. You get a tax deduction and your child's income is probably low enough that he or she won't need to file a tax return. Your child can also make a contribution to a traditional IRA or Roth IRA up to the lesser of their wages or $4,000. Imagine how much a Roth IRA contribution of $2,000 made for a 13 year old could grow tax-free over the fifty years before that child retires.

Tip #141
Day Traders
If you are a day trader you can get the tax benefits of doing a mark-to-market election which allows you to disregard the wash sale rules and allows you to deduct more than $3,000 in capital losses a year on your tax return. The criteria for who qualifies as a day trader and how to do the mark-to-market election are complicated and you should research it to determine your eligibility and how to do it. On a personal note, I've prepared tax returns for about a dozen day traders in the past and I've never seen one that is profitable. I've seen two clients lose over a million dollars each in a single year through day trading in a year that the market went up. I'm sure there are profitable day traders, but I've never seen one.

Tip #142
New Energy Credits for Homeowners
There are two new energy credits for homeowners that apply to purchases made in 2006 and 2007. For full details about who qualifies and the restrictions, go to the IRS web site, www.irs.gov. The first credit gives you a tax credit on purchases buying qualified energy efficiency improvements for your existing home. The following items are potentially eligible: Insulation systems that reduce heat loss/gain, exterior windows (including skylights), exterior doors, certain metal roofs, advanced main air circulating fans, qualified natural gas, propane, or oil furnace or hot water heater. Other items of qualified energy efficient property can also qualify. The first credit has a lifetime maximum of $500 and no more than $200 of the credit can be attributable to expenses for windows.

The second credit is available to those who add qualified solar panels, solar water heating equipment, or a fuel cell power plant to their homes in the United States. Taxpayers are allowed one credit equal to 30 percent of the qualified investment in a solar panel up to a maximum credit of $2,000, and another equivalent credit for investing in a solar water heating system. No part of either system can be used to heat a pool or hot tub. Additionally, taxpayers are also allowed a 30 percent tax credit for the purchase of qualified fuel cell power plants. The credit may not exceed $500 for each .5 kilowatt of capacity.

Tip #143
VA Disability Benefits
Veterans Administration disability benefits are tax free. There's nothing to report on your tax return for VA disability benefits.

Tip #144
Accrued Interest on Bonds
If you buy a bond in between the interest dates, the accrued interest from before you buy the bond will be included in your 1099-INT as taxable income. You can deduct the accrued interest from the 1099-INT amount on your tax return. If you have over $1,500 in interest income and need to file Schedule B, you would have one line that reports the full amount of the 1099-INT then the next line you would write down Accrued Interest and enter the amount of accrued interest as a negative to reduce the taxable amount of interest income. For example, you buy a company's bond that pays out interest once a year on January 1st. If you buy the bond in the middle of the year on July 1st and the company pays you $1,000 in interest on January 1st, you will receive a 1099-INT from the company for a full $1,000. Since you only owned the bond for half the time period the interest was accruing, only $500 of the bond interest would be taxable income on your tax return.

Tip #145
Basis of Property Received in Divorce Settlement
The cost basis and holding period of property you receive from an ex-spouse in a divorce settlement is the same basis and holding period your ex-spouse had. For example, if your ex-spouse bought 50 shares of XYZ Corp for $4,700 on January 10, 2001 and you receive those 50 shares as part of the divorce settlement, your cost basis in the XYZ stock is $4,700 and the date acquired for the stock is January 10, 2001, not the date you received the stock as part of the divorce settlement.

Tip #146
Cancellation of Debt
You usually receive Form 1099-C when you have a loan or debt cancelled. Sometimes, the amount of cancelled debt on the Form 1099-C needs to be picked up as income on your Form 1040 on the Other Income line. However, many people fall under one of the exceptions and don't need to report the cancelled debt as income. If your debt was cancelled as part of bankruptcy it is not included as income on your tax return. If you don't go through bankruptcy, but are insolvent when the debt is cancelled, you don't need to report the income. Insolvency is when your liabilities exceed your assets at the time of the debt cancellation.

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