Tax Rules May Affect Your Child’s Investment Income

IRS Tax Tip 2012-52


Parents may not realize that there are tax rules that may affect their child’s investment income. The IRS offers the following four facts to help parents determine whether their child’s investment income will be taxed at the parents’ rate or the child’s rate.

  1. Investment income Children with investment income may have part or all of this income taxed at their parents’ tax rate rather than at the child’s rate. Investment income includes interest, dividends, capital gains and other unearned income.
  2. Age requirement The child’s tax must be figured using the parents’ rates if the child has investment income of more than $1,900 and meets one of three age requirements for 2011:

    • Was under age 18 at the end of the year,

    • Was age 18 at the end of the year and did not have earned income that was more than half of his or her support, or

    • Was a full-time student over age 18 and under age 24 at the end of the year and did not have earned income that was more than half of his or her support.

  3. Form 8615  To figure the child’s tax using the parents’ rate for the child’s return, fill out Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, and attach it to the child’s federal income tax return.
  4. Form 8814  When certain conditions are met, a parent may be able to avoid having to file a tax return for the child by including the child’s income on the parent’s tax return. In this situation, the parent would file Form 8814, Parents’ Election To Report Child’s Interest and Dividends.

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Ten Things to Know About Capital Gains and Losses

IRS Tax Tip 2012-35

Did you know that almost everything you own and use for personal or investment purposes is a capital asset? Capital assets include a home, household furnishings and stocks and bonds held in a personal account. When you sell a capital asset, the difference between the amount you paid for the asset and its sales price is a capital gain or capital loss.

Here are 10 facts from the IRS about how gains and losses can affect your federal income tax return.

  1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.
  2. When you sell a capital asset, the difference between the amount you sell it for and your basis – which is usually what you paid for it – is a capital gain or a capital loss.
  3. You must report all capital gains.
  4. You may only deduct capital losses on investment property, not on personal-use property.
  5. Capital gains and losses are classified as long-term or short-term. If you hold the property more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.
  6. If you have long-term gains in excess of your long-term losses, the difference is normally a net capital gain. Subtract any short-term losses from the net capital gain to calculate the net capital gain you must report.
  7. The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2011, the maximum capital gains rate for most people is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of the net capital gain. Rates of 25 or 28 percent may apply to special types of net capital gain.
  8. If your capital losses exceed your capital gains, you can deduct the excess on your tax return to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.
  9. If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.
  10. This year, a new form, Form 8949, Sales and Other Dispositions of Capital Assets, will be used to calculate capital gains and losses. Use Form 8949 to list all capital gain and loss transactions. The subtotals from this form will then be carried over to Schedule D (Form 1040), where gain or loss will be calculated.


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Injured or Innocent Spouse Tax Relief

IRS Tax Tip 2012-60

You may be an injured spouse if you file a joint tax return and all or part of your portion of a refund was, or is expected to be, applied to your spouse’s legally enforceable past due financial obligations.

Here are seven facts about claiming injured spouse relief:

1. To be considered an injured spouse; you must have paid federal income tax or claimed a refundable tax credit, such as the Earned Income Credit or Additional Child Tax Credit on the joint return, and not be legally obligated to pay the past-due debt.

2. Special rules apply in community property states. For more information about the factors used to determine whether you are subject to community property laws, see IRS Publication 555, Community Property.

3. If you filed a joint return and you’re not responsible for the debt, but you are entitled to a portion of the refund, you may request your portion of the refund by filing Form 8379, Injured Spouse Allocation.

4. You may file form 8379 along with your original tax return or your may file it by itself after you receive an IRS notice about the offset.

5. You can file Form 8379 electronically. If you file a paper tax return you can include Form 8379 with your return, write “INJURED SPOUSE” at the top left of the Form 1040, 1040A or 1040EZ. IRS will process your allocation request before an offset occurs.

6. If you are filing Form 8379 by itself, it must show both spouses’ Social Security numbers in the same order as they appeared on your income tax return. You, the “injured” spouse, must sign the form.

7. Do not use Form 8379 if you are claiming innocent spouse relief. Instead, file Form 8857, Request for Innocent Spouse Relief. This relief from a joint liability applies only in certain limited circumstances. However, in 2011 the IRS eliminated the two-year time limit that applies to certain relief requests. IRS Publication 971, Innocent Spouse Relief, explains who may qualify, and how to request this relief.

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IRS Proposes Regs on Deducting Local Lodging Expenses

The Internal Revenue Service has proposed regulations relating to the deductibility of lodging expenses when not traveling away from home.

In REG-137589-07, the IRS noted that Section 1.262-1 of the Income Tax Regulations generally disallows a deduction for local lodging expenses. The proposed regulations would allow taxpayers to deduct local lodging expenses as ordinary and necessary business expenses in appropriate circumstances.

Section 162(a) of the Tax Code allows a deduction for all of the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.  “Whether an expense is ordinary and necessary is a question of fact,” said the IRS. “In general, a trade or business expense is ordinary if it is normal, usual, or customary in the taxpayer’s type of business. An expense is necessary if it is appropriate and helpful for the development of the taxpayer’s business. … An expense that serves primarily to furnish the taxpayer with a social or personal benefit, and is only secondarily related to business, is not a necessary business expense under Section 162(a).”

The cost of local lodging that a taxpayer pays or incurs primarily for the taxpayer’s convenience or personal benefit is not an ordinary and necessary expense of a business or income-producing activity. Similarly, the cost of local lodging provided to an employee by an employer for the employee’s convenience or personal benefit would not be deductible by the employee if the employee paid the cost directly. Therefore, the value of the lodging under those circumstances is not excludible from the gross income of an employee as a working condition fringe, and reimbursement for the cost of the lodging under those circumstances is not a payment under an accountable plan. 

The cost of local lodging is for the convenience or personal benefit of an employee (or other recipient) if, for example, the lodging is provided to the employee (1) as additional compensation, such as to provide a weekend at a luxury hotel or resort; (2) to enable the employee to avoid a long-distance commute; (3) because the employee is required to work overtime; (4) as housing for a recently relocated employee while the employee searches for permanent housing; or (5) for the employee’s indefinite personal use. 

An employer may deduct the costs the employer incurs in providing the lodging in each of these cases under Section 162(a) as compensation for services.  However, because the primary purpose of the lodging is to provide the employee with a personal benefit, if the employee pays the cost of the lodging directly, the employee may not deduct the expense as an ordinary and necessary business expense under Section 162(a).  Therefore, a cash reimbursement of the cost is not excludible from the employee’s gross income under Section 62(c) and the value of the lodging is not excludible from the employee’s gross income under Section 132(d) as a working condition fringe.

Expenditures for local lodging may qualify as deductible ordinary and necessary expenses under appropriate circumstances if all other requirements of Section 162 are met.  For example, an employer may require its employees to stay at a local hotel for the bona fide purpose of facilitating training or team building directly connected with the employer’s trade or business.

Similarly, a professional sports team may require its employees (players and coaches) to stay at a local hotel the night before a home game to ensure physical preparedness and allow for last minute training. 

Under these circumstances, the cost of the lodging is primarily for the business purposes of the employer and not to provide a personal benefit to the employees.  The cost of the lodging would be deductible by an employee under Section 162 if the employee paid the cost directly, and thus the value of the lodging may be excluded from the employee’s gross income as a working condition fringe if other requirements are satisfied. Similarly, a payment from the employer reimbursing the employee for the cost of the lodging may be excluded from the employee’s gross income as a payment under an accountable plan if all the requirements of an accountable plan are met.

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Small Businesses Proceed Cautiously as Economy Improves

More than one-third (35 percent) of small business owners believe the economy is recovering, but they are proceeding cautiously and managing their resources more closely by tempering plans for growth, hiring modestly and getting more out of their employees.

A new survey by American Express found that 67 percent of the small owners polled say that workforce productivity has improved and fewer are concerned about having cash available to pay bills (50 percent vs. 59 percent last spring).

The employment picture is improving at small businesses, with 35 percent planning to hire full- or part-time employees (up from 31 percent in the fall), and far fewer said they will freeze hiring or cut back (44 percent, down from 61 percent in the fall). In spite of the promising outlook, these signs of recovery do not translate into immediate plans for growth. The top priority of small business owners is maintaining their current business and sources of revenue (31 percent) followed closely by growing their business (29 percent, down from 37 percent last spring).

Thirty-four percent of business owners say their appetite for risk is greater than it was a year ago. Men are far more likely to say their appetite for risk is greater than it was a year ago (42 percent compared to 25 percent of women). The type of risk entrepreneurs are most willing to assume in order to grow their business is entering a new/unexplored market (19 percent).

While growth is not currently a top priority, when asked what would most help them grow their businesses, nearly half (46 percent) say increased customer demand. Other growth generators include tax cuts (20 percent), access to capital (13 percent) and the ability to hire more staff (7 percent). Tax relief is the most pressing issue the President and Congress need to address (33 percent).

Entrepreneurs looking beyond U.S. borders for growth opportunities are among those most likely to experience steady revenue gains. While they are still the minority (15 percent), their success is noteworthy: they report 23 percent revenue growth on average over the last three years.

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How to Get Tax Help from the IRS

IRS Tax Tip 2012-66


When tax season is in full swing, the Internal Revenue Service receives millions of calls and thousands of taxpayer visits daily. For faster service, avoid peak times like Monday and Friday mornings when wait times are usually longest. Better yet, get the help you need online 24/7 without delay at

The IRS website has a wealth of information, including hundreds of publications and guides on almost any tax-related topic. The instructions for a particular form can often provide the answers you need. The Interactive Tax Assistant can also help. It’s a tax law resource that asks a series of questions and provides you with responses to common tax law questions.

Many taxpayers call the IRS’s main help line when they could easily help themselves at or get services more directly from automated or specialized phone lines.

Check on your refund Use the “Where’s My Refund?” tool at or the automated system at 1-800-829-1954. IRS Phone representatives don’t have any additional information beyond what these tools provide.

Get forms and publications If all you need is forms or publications, download and print them at or call 1-800-TAX-FORM (800-829-3676) to have them mailed, for free, to your home.

Get previous years’ tax info You can order a transcript of your account at

Payment plans If you can’t pay the tax you owe, you can apply for an installment agreement using the Online Payment Agreement application, or you can print the Form 9465, Installment Agreement Request from, then complete and mail it.

Business taxpayers Taxpayers with small business-related questions should call 1-800-829-4933.

Understanding a notice If you received a notice, call the number on your notice, not the main help line, to reach the IRS staff trained to help with that issue.

Specialized reasons If you’re calling for a very specific reason, there may be a direct phone number you should call instead of the main IRS help line. Visit the “Contact IRS” link at to get more information on contacting the IRS about reporting identity theft or fraud, reaching the Taxpayer Advocate Service, voluntarily disclosing offshore accounts, information on the Health Coverage Tax Credit, or if you’re calling from outside the United States.

Some taxpayers prefer face-to-face tax help. The IRS sponsors Volunteer Income Tax Assistance and Tax Counseling for the Elderly sites in local communities. To find the closest site, search “VITA” on or call 1-800-906-9887. Call 1-888-227-7669 to find TCE sites through AARP, an IRS partner. The IRS also has Taxpayer Assistance Centers located throughout the country. To find IRS offices, use the locator tool found through “Contact Your Local IRS Office” on Be sure to check office hours and services offered before visiting your local IRS office.

There may be some circumstances when you need to call the IRS main taxpayer assistance line, which is 1-800-829-1040. Here are a couple of tips on when to call:

• Call if you have questions about your tax account such as a high dollar balance due or the balance due on your installment agreement.

• Call the IRS if you can’t figure out how or if certain tax laws apply to your situation. IRS representatives can discuss your individual circumstances and help you understand your tax obligations or benefits.

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Missed the Income Tax Deadline – IRS Offers Help for Taxpayers

Tax Tip 2012-06

 The IRS has some advice for taxpayers who missed the tax filing deadline.

 Don’t panic but file as soon as possible. If you owe money the quicker you file your return, the less penalties and interest you will have to pay. Even if you have to mail us your return, the sooner we receive it, the better.

 E-file is still your best option. IRS e-file programs are available for most taxpayers through the extension deadline – October 15, 2012.

 Free File is still available. Check out IRS Free File. Taxpayers whose income is $57,000 or less will qualify to file their return for free through IRS Free File. For people who make more than $57,000 and who are comfortable preparing their own tax return, the IRS offers Free File Fillable Forms. There is no software assistance with Free File Fillable Forms, but it does the basic math calculations for you.

 Pay as much as you are able. Taxpayers who owe tax should pay as much as they can when they file their tax return, even if it isn’t the total amount due, and then apply for an installment agreement to pay the remaining balance.

 Installment Agreements are available.  Request a payment agreement with the IRS.  File Form 9465, Installment Agreement Request or apply online using the IRS Online Payment Agreement Application.

 Penalties and interest may be due.  Taxpayers who missed the filing deadline may be charged a penalty for filing after the due date. Filing as soon as possible will keep this penalty to a minimum.  And, taxpayers who did not pay their entire tax bill by the due date may be charged a late payment penalty. The best way to keep this penalty to a minimum is to pay as much as possible, as soon as possible.

 Although it cannot waive interest charges, the IRS will consider reductions in these penalties if you can establish a reasonable cause for the late filing and payment. Information about penalties and interest can be found at Avoiding Penalties and the Tax Gap.

Refunds may be waiting. Taxpayers should file as soon as possible to get their refunds. Even if your income is below the normal filing requirement, you may be entitled to a refund of taxes that were withheld from your wages, quarterly estimated payments or other special credits. You will not be charged any penalties or interest for filing after the due date, but if your return is not filed within three years you could forfeit your right to the refund.

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Eight Facts to Know if You Receive an IRS Letter or Notice

Issue Number:    IRS Tax Tip 2012-73

The IRS sends millions of letters and notices to taxpayers for a variety of reasons. Many of these letters and notices can be dealt with simply, without having to call or visit an IRS office.

Here are eight things to know about IRS notices and letters.

1. There are a number of reasons why the IRS might send you a notice. Notices may request payment, notify you of account changes, or request additional information. A notice normally covers a very specific issue about your account or tax return.

2. Each letter and notice offers specific instructions on what action you need to take.

3. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.

4. If you agree with the correction to your account, then usually no reply is necessary unless a payment is due or the notice directs otherwise.

5. If you do not agree with the correction the IRS made, it is important to respond as requested. You should send a written explanation of why you disagree and include any documents and information you want the IRS to consider along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left of the notice. Allow at least 30 days for a response.

6. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right of the notice. Have a copy of your tax return and the correspondence available when you call to help the IRS respond to your inquiry.

7. It’s important to keep copies of any correspondence with your records.

8. IRS notices and letters are sent by mail. The IRS does not correspond by email about taxpayer accounts or tax returns.

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Amended Returns: Eight Facts

IRS Tax Tip 2012-72

If you discover an error on your federal income tax return after you e-filed or mailed it, you may want or need to amend your return. Perhaps you are eligible for a deduction or credit and you missed it the first time?

Here are eight key points the IRS wants you to know about when considering whether to file an amended federal income tax return.

  1. Use Form 1040X, Amended U.S. Individual Income Tax Return, to file an amended income tax return.
  2. Use Form 1040X to correct previously filed Forms 1040, 1040A or 1040EZ. An amended return cannot be e-filed; you must file it by paper.
  3. Generally, you do not need to file an amended return to correct math errors. The IRS will automatically make that correction. Also, do not file an amended return because you forgot to attach tax forms such as W-2s or schedules. The IRS normally will send a request asking for those.
  4. Be sure to enter the year of the return you are amending at the top of Form 1040X. Generally, you must file Form 1040X 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.
  5. If you are amending more than one tax return, prepare a 1040X for each return and mail them in separate envelopes to the appropriate IRS campus. The 1040X instructions list the addresses for the campuses.
  6. If the changes involve another schedule or form, you must attach that schedule or form to the amended return.
  7. If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund.
  8. If you owe additional 2011 tax, file Form 1040X and pay the tax before the due date to limit interest and penalty charges that could accrue on your account. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions.

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Failure to File or Pay Penalties: Eight Facts

Issue Number:    IRS Tax Tip 2012-74

The number of electronic filing and payment options increases every year, which helps reduce your burden and also improves the timeliness and accuracy of tax returns. When it comes to filing your tax return, however, the law provides that the IRS can assess a penalty if you fail to file, fail to pay or both.

Here are eight important points about the two different penalties you may face if you file or pay late.

1. If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty.

2. The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return on time and pay as much as you can, then explore other payment options. The IRS will work with you.

3. The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.

4. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

5. If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.

6. If you request an extension of time to file by the tax deadline and you paid at least 90 percent of your actual tax liability by the original due date, you will not face a failure-to-pay penalty if the remaining balance is paid by the extended due date.

7. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

8. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

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