Better Business Blog

With energy costs skyrocketing, you would think that the federal government would come up with some tax incentives aimed at curbing the consumption of energy. However, on the consumer end of taxes, the incentives are actually fading away. Apparently, federal lawmakers and administrators believe the high cost of energy itself is incentive enough to reduce consumption. The following are the only energy-related tax incentives remaining for individual taxpayers:

• Credit for Energy-Efficient Home Modifications – Through 2013, a taxpayer can still claim a credit for making qualifying energy-saving improvements to his existing home. But after 2013, this credit will not be available. The credit is 10% of the cost of making the improvement but is limited to $500 and is reduced by any credit claimed under this provision in any prior year.

  Qualified energy-efficiency improvements are the following building-envelope components installed on or in a taxpayer’s main home in the United States that the taxpayer owned during 2012, provided that the original use of the component (1) began with the taxpayer and the component can be expected to remain in use at least 5 years and (2) the component meets certain energy standards. These credits are nonrefundable and can offset both income tax and alternative minimum tax (AMT) for the year.

  • Any insulation material or system that is specifically and primarily designed to reduce heat loss or gain of a home when installed in or on the home(1).o Exterior windows and skylights. The credit for these items is limited to $200(1)(2).
  • Exterior doors(1)(2).
  • Any metal roof with appropriate pigmented coatings or an asphalt roof with appropriate cooling granules that are specifically and primarily designed to reduce the heat gain of the home(1)(2).
  • Certain electric heat pump water heaters; electric heat pumps; central air conditioners; natural gas, propane, or oil water heaters; and stoves that use biomass fuel. No more than $300 if the cost is credit-eligible.
  • Qualified natural gas, propane, or oil furnaces and qualified natural gas, propane, or oil hot water boilers. No more than $150 of the cost is credit-eligible.
  • Certain advanced main air circulating fans used in natural gas, propane, or oil furnaces. No more than $50 of the cost is credit-eligible.
    (1) To figure the credit, do not include the amounts paid for the onsite preparation, assembly, or original installation.
    (2) Must meet or exceed the Energy Star program requirements.

• Energy Generation Credits – Through 2016, a taxpayer can claim a credit for installing systems that generate energy. The expenses used to determine the credit include installation costs; but generally no portion of the cost allocated to heating a swimming pool or hot tub can be used toward the credit.
  • Solar electric systems – A credit equal to 30% of the cost for the installation of a qualified solar electric system (50% of the energy is generated from the sun) in the taxpayer’s primary or secondary home in the United States.
  • Solar water heating systems – A credit equal to 30% of the cost for the installation of a qualified solar water heating system in the taxpayer’s primary or secondary home in the United States.
  • Fuel cell power plant – A credit of $500 per 0.5 kilowatts of electricity generated by electrochemical means from a qualified fuel cell plant installed in the taxpayer’s primary home in the United States.

    These credits are nonrefundable and can offset both income tax and AMT for the year. However, any unused credit can be carried forward.

• Plug-in Electric Vehicles Credit – The American Taxpayer Relief Act (ATRA) of 2012 modified and extended for two years, through 2013, the individual income tax credit for highway-capable plug-in motorcycles and 3-wheeled vehicles, replacing the 10% tax credit that expired at the end of 2011 for plug-in electric motorcycles, 3-wheeled vehicles, and low-speed vehicles.

  Through revised definitions, ATRA repeals the ability of golf carts and other low-speed vehicles to qualify for the credit. The credit continues to be the lesser of 10% of the purchase cost or $2,500 per qualified vehicle. The revised rules require that the vehicle must have been manufactured primarily for use on public streets, roads, and highways; be capable of a speed of at least 45 miles per hour; and be acquired in 2012 or 2013.

  Other requirements are the same as under the old credit: The vehicle must have 2 or 3 wheels, have a gross vehicle weight rating of fewer than 14,000 pounds, and have been acquired for use or lease by the taxpayer and not for resale. The original use must be with the taxpayer and the vehicle must have been made by a manufacturer and be propelled to a significant extent by an electric motor that draws electricity from a battery with a capacity of no less than 2.5 kilowatt hours.

  The personal use portion of this credit is nonrefundable and may offset both the current year’s income tax and AMT. However, if the vehicle is used for business, the unused business portion of the credit can be carried back one year and then carried forward up to 20 years. This credit (other than any business portion being carried over) will no longer be available after 2013.

If you have a question related to any of these credits, you may wish to contact this office in advance to verify how the tax benefits will apply to your specific tax situation.

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The IRS is experiencing very high demand on their “Where’s My Refund” tool. The following is their statement as published on their website.  We’re curious to hear if you’ve already filed your return and how long it’s taken to receive your refund.

The IRS alerted taxpayers and the tax community it is experiencing high traffic on “Where’s My Refund?” as more tax returns come in. The heavy volume of refund inquiries means that the IRS anticipates both “Where’s My Refund?” on IRS.gov and the refund feature on the IRS2go phone app will have limited availability during busier periods.

Due to the large number of inquiries and to avoid service disruptions, the IRS strongly urges taxpayers to only check on their refunds once a day. IRS systems are only updated once a day, usually overnight, and the same information is available whether on the Internet, IRS2go smartphone app or on IRS toll-free lines. While ”Where’s My Refund?” is updated nightly, your account will not change that frequently.

The IRS is seeing a good start to the filing season, and tax refunds are being issued timely. Nine out of 10 taxpayers typically receive refunds in less than 21 days when they use e-file with direct deposit.

The IRS expects to see the number of tax returns — and related refund inquiries — steadily increase around the President’s Day holiday week.

Here are some tips to help taxpayers with their refund questions:

• Have the right tax information ready before using any of the IRS refund tools. This includes Social Security number, filing status and refund amount.
• You don’t need to check “Where’s My Refund?” more than once a day as your information will not change.
• To avoid system delays, the best time to check on refunds is evening and weekends.
• There is no need to call the IRS about your refund; the telephone service has the same information that is available on “Where’s My Refund?”.

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If you’re like most taxpayers, you find yourself with an ominous stack of “homework” around TAX TIME! Unfortunately, the job of pulling together the records for your tax appointment is never easy, but the effort usually pays off when it comes to the extra tax you save! When you arrive at your appointment and are fully prepared, you’ll have more time to:

• Consider every possible legal deduction;
• Better evaluate your options for reporting income and deductions to choose those that are best suited to your situation;
• Explore current law changes that affect your tax status;
• Talk about possible law changes and discuss tax planning alternatives that could reduce your future tax liability.

Choosing Your Best Alternatives

The tax law allows a variety of methods for handling income and deductions on your return. Choices made at the time you prepare your return often affect not only the current year, but future returns as well. When you’re fully prepared for your appointment, you will have more time to explore all avenues available for lowering your tax.

For example, the law allows choices in transactions like:

Sales of property. . . .

If you’re receiving payments on a sales contract over a period of years, you are sometimes able to choose between reporting the whole gain in the year you sell or over a period of time as you receive payments from the buyer.

Depreciation. . . .

You’re able to deduct the cost of your investment in certain business property using different methods. You can either depreciate the costs over a number of years; or, in certain cases, you can deduct them all in one year.

Where to Begin?

Ideally, preparation for your tax appointment should begin in January of the tax year you’re working with. Right after the New Year, set up a safe storage location – a file drawer, a cupboard, a safe, etc. As you receive pertinent records, file them right away, before they’re forgotten or lost. By making the practice a habit, you’ll find your job a lot easier when your actual appointment date rolls around.

Other general suggestions to consider for your appointment preparation include:

• Segregate your records according to income and expense categories. For instance, file medical expense receipts in an envelope or folder, mortgage interest payment records in another, charitable donations in a third, etc. If you receive an organizer or questionnaire to complete before your appointment, make certain you fill out every section that applies to you. (Important: Read all explanations and follow instructions carefully to be sure you don’t miss important data – organizers are designed to remind you of transactions you may miss otherwise.)
• Be sure to call our attention to any foreign bank account, foreign financial account or foreign trust in which you have an ownership interest, signature authority or control over. We also need to know about foreign inheritances and ownership of foreign assets. Generally any foreign financial dealings should be brought to our attention so we can determine if you have any special reporting requirements. The penalties for not making and submitting the required reports can be draconian.
• Keep your annual income statements separate from your other documents (e.g., W-2s from employers, 1099s from banks, stockbrokers, etc., and K-1s from partnerships). Be sure to take these documents to your appointment, including the instructions for K-1s!
• Write down questions you may have so you don’t forget to ask them at the appointment. Review last year’s return. Compare your income on that return to the income for the current year. For instance, a dividend from ABC stock on your prior-year return may remind you that you sold ABC this year and need to report the sale or that you haven’t yet received the 1099-DIV form for the current year.
• Make certain that you have social security numbers for all your dependents. The IRS checks these carefully and can deny deductions for returns filed without them.
• Compare deductions from last year with your records for this year. Did you forget anything?
• Collect any other documents and financial papers that you’re puzzled about. Prepare to bring these to your appointment so you can ask about them.

Accuracy Even for Details

To ensure the greatest accuracy possible in all detail on your return, make sure you review personal data. Check name(s), address, social security number(s) and occupation(s) on last year’s return. Note any changes for this year. Although your telephone number isn’t required on your return, current home and work numbers are always helpful should questions occur during return preparation.

Marital Status Change

If your marital status changed during the year, if you lived apart from your spouse or if your spouse died during the year, list dates and details. Bring copies of prenuptial, legal separation, divorce or property settlement agreements, if any, to your appointment. If your spouse passed away during the year, you should have a copy of his or her trust agreement or will available for review.

Dependents

If you have qualifying dependents, you will need to provide the following for each:

• First and last name
• Social security number
• Birth date
• Number of months living in your home
• Their income amount (both taxable and nontaxable)

If you have dependent children over age 18, note how long they were full-time students during the year. To qualify as your dependent, an individual must pass five strict dependency tests. If you think a person qualifies as your dependent (but you aren’t sure), tally the amounts you provided toward his/her support vs. the amounts he/she provided. This will simplify making a final decision about whether you really qualify for the dependency deduction.

Some Transactions Deserve Special Treatment

Certain transactions require special treatment on your tax return. It’s a good idea to invest a little extra preparation effort when you have had the following transactions:

Sales of Stock or Other Property: All sales of stocks, bonds, securities, real estate and any other type of property need to be reported on your return, even if you had no profit or loss. List each sale, and have the purchase and sale documents available for each transaction.

Purchase date, sale date, cost and selling price must all be noted on your return. Make sure this information is contained on the documents you bring to your appointment.

Gifted or Inherited Property: If you sell property that was given to you, you need to determine when and for how much the original owner purchased it. If you sell property you inherited, you need to know the date of the decedent’s death and the property’s value at that time. You may be able to find this information on estate tax returns or in probate documents.

Reinvested Dividends: You may have sold stock or a mutual fund in which you participated in a dividend reinvestment program. If so, you will need to have records of each stock purchase made with the reinvested dividends.

Sale of Home: The tax law provides special breaks for home sale gains, and you may be able to exclude all (or a part) of a gain on a home if you meet certain ownership, occupancy and holding period requirements. If you file a joint return with your spouse and your gain from the sale of the home exceeds $500,000 ($250,000 for other individuals), record the amounts you spent on improvements to the property. Remember, too, possible exclusion of gain applies only to a primary residence, and the amount of improvements made to other homes is required regardless of the gain amount. Be sure to bring a copy of the sale documents (usually the closing escrow statement) with you to the appointment.

Purchase of a Home: Be sure to bring a copy of the closing escrow statement if you purchased a home.

Vehicle Purchase: If you purchased a new plug-in electric car (or cars) this year, you may qualify for a special credit. Please bring the purchase statement to the appointment with you.

Home Energy-Related Expenditures: If you installed solar, geothermal or wind power generating systems, please bring the details of those purchases and the manufacturer’s credit qualification certification to your appointment. You may qualify for a substantial energy-related tax credit.

Identity Theft: Identity theft is becoming more and more prevalent and can impact your tax filings. If you have reason to believe that your identity has been stolen, please contact this firm as soon as possible. The IRS provides special procedures for filing returns of taxpayers who have had their identity stolen.

Car Expenses: Where you have used one or more automobiles for business, list the expenses of each separately. The government requires that you provide your total mileage, business miles, and commuting miles for each car on your return, so be prepared to have them available. If you were reimbursed for mileage through an employer, know the reimbursement amount and whether the reimbursement is included in your W-2.

Charitable Donations: Cash contributions (regardless of amount) must be substantiated with a bank record or written communication from the charity showing the name of the charitable organization, date and amount of the contribution.

Cash donations put into a “Christmas kettle,” church collection plate, etc., are not deductible. For clothing and household contributions, the items donated must generally be in good or better condition, and items such as undergarments and socks are not deductible. A record of each item contributed must be kept, indicating the name and address of the charity, date and location of the contribution, and a reasonable description of the property. Contributions valued less than $250 and dropped off at an unattended location do not require a receipt. For contributions of $500 or more, the record must also include when and how the property was acquired and your cost basis in the property. For contributions valued at $5,000 or more and other types of contributions, please call this office for additional requirements.

If you have questions about assembling your tax data prior to your appointment, please give this office a call.

Steve Trojan, CPA is owner of SMT & Associates, Inc. (www.smt-associates.com), a Crystal Lake IL based tax and accounting firm, and Complete Payroll, Inc. (www.completepayrollinc.com). He specializes in tax and accounting issues affecting business owners and investors.

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