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News and Views about Taxes

Archive for January 2010

Claiming an exemption when you are not the custodial parent

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The IRS has changed the rules for claiming an exemption for your child if you are not the custodial parent. For tax years 2009 and forward, you are generally required to file Form 8332, which the custodial parent must sign indicating that he/she agrees to the release of the exemption.

If your divorce decree or separation agreement was executed prior to 2009, you can attach certain pages of the decree or agreement in lieu of Form 8332, provided that the decree or agreement states that (a) the noncustodial parent can claim the child with no strings attached (specifically WRT payment of child support), (b) the custodial parent will not claim the child as a dependent, and (c) the years for which the custodial parent’s claim will be released to the noncustodial parent. If your decree or agreement qualifies, you must attach the cover page (where you would include the custodial parent’s SSN), the pages that include the required information above, and the signature page with the custodial parent’s signature and date of agreement.

You must attach either Form 8332 or the required copies of a pre-2009 divorce decree or separation agreement to your return in each year that you claim the exemption as a noncustodial parent.


Written by nctaxpro

January 25, 2010 at 3:24 pm

Posted in Federal, Taxes

Why was my return rejected?

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It happens. You file your return electronically and it kicks back to you with a note stating that the IRS rejected it with some obscure numeric code. When it happens, what do you do?

First of all, verify that you correctly entered the information for you, your spouse, and your dependents, and that there are no typos (names, SS numbers, W-2 info, etc.). Most of the time, when a return is rejected, it’s because of a mismatch between information that the IRS has on file and the information received on the return – and more often than not, it’s because of a typo. All you should have to do at that point is correct the typos and resubmit the return.

Other than typos, these are the most common reasons for rejection that we see:

1. Error code 507, often with error code 506. We see this one with single parents, and it means that someone else (usually the other parent) has already filed a return claiming the same dependent. Code 507 applies to the 1040, code 506 applies to Form EIC for earned income credit. The IRS will not accept another electronically filed return with that dependent, so you can either file a paper return, or file an electronic return without the dependent and then file an amended return later with the dependent – in either case, you should attach the supporting documentation which justifies your claim to the dependent’s exemption to the paper return.

2. Error code 500, and error code 503. We see this one a lot for newlyweds, and it usually means that one spouse or the other has forgotten to change their Social Security card to show their married name. Just change the name on the return to match the name on the card – and make sure you change the name before next year!

3. Error code 502. We see this one mostly on hand-prepared W-2s, and it means that the Employer ID number on the W-2 is invalid. In this case, you should contact the employer to have a new W-2 issued with the correct EIN.

4. Error code 515. When you see this, it means that the return has already been submitted to the IRS. Most of the time this results from a transmission hiccup which leads to a return neing sent twice, and you don’t need to do anything. If you are absolutely certain that the return wasn’t submitted before, your best bet (as much as I hate to say it) is to call the IRS.

If you see one that you can’t figure out, ask a tax pro for an explanation; many of us don’t mind sharing.

Written by nctaxpro

January 23, 2010 at 11:25 am

Posted in Federal, Taxes

2009 NC Individual Income Tax Law Changes

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As usual, North Carolina made changes to the NC personal income tax for 2009, and there were a couple of changes at the federal level that affect state taxpayers as well. Most of these changes affect only a handful of taxpayers, but some have a potentially significant impact:

1. North Carolina has imposed a surtax on high-income taxpayers. The surtax is due if North Carolina
taxable income is greater than the amount shown below for the taxpayer’s filing status:

  • Married filing jointly/qualifying widow(er) $ 100,000
  • Head of household $ 80,000
  • Single $ 60,000
  • Married filing separately $ 50,000
  • The surtax is 2% of the tax due when NC taxable income exceeds the specified amounts, and rises to 3% of the tax due if NC taxable income is greater than the amount shown below for the taxpayer’s filing status:

  • Married filing jointly/qualifying widow(er) $ 250,000
  • Head of household $200,000
  • Single $150,000
  • Married filing separately $125,000
  • For example, if you are MFJ with NC taxable income of $125,000, your regular tax due would be $8725, and the surtax due would be 2% of $8725, or $175 (OK, $174.50, but we always round to the nearest dollar). If you are single with NC taxable income of $200,000, your regular tax due would be $14,923, and the surtax would be 3% of that amount, or $448. The surtax is calculated on line 15 of NC D-400.

    Don’t ask me why the income limits are set as they are – ask your state legislator!

    2. Under the federal Military Spouses Residency Relief Act, the income earned for services performed in North Carolina by the spouse of a service member who is legally domiciled in a state other than North Carolina is exempt from North Carolina income tax if (1) the service member is present in North Carolina solely in compliance with military orders; (2) the spouse is in North Carolina solely to be with the service member; and (3) the spouse is domiciled in the same state as the service member. All three conditions must be met to qualify for exemption. A spouse who meets these conditions is required to file a NC tax return in order to receive a refund of taxes withheld, and should also file a new NC-4 with his/her employer certifying that the spouse is exempt from NC withholding. Note that this exemption applies only to income earned by the spouse; NC-source income from other sources (e.g. NC rental property, gambling winnings, etc.) is still taxable.

    3. If you take the standard deduction, and claim the additional deduction for real estate taxes paid, or if you take the new sales tax deduction for purchase of a new vehicle, NC requires that you add the amount back to your federal taxable income for NC tax purposes.

    Written by nctaxpro

    January 18, 2010 at 11:16 am

    Posted in North Carolina, Taxes

    “I vant to be a loan…”

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    Let’s get this out of the way at the beginning…

    I hate Refund Anticipation Loans (RALs). Most of the tax preparers with whom I work, and with whom I have contact outside of work, hate them too. Marketing them under titles such as “rapid refund”, “express refund”, and so forth is the worst form of misleading advertising possible – they are NOT refunds, they are loans. I’d love to see them go away. That said…

    The overwhelming majority of clients that we see who request RALs do not have bank accounts and cannot get them. Most of these clients cash paychecks at the Wal-Mart or the local convenience store , buy money orders to pay for rent and utilities, and deal in cash otherwise. Telling them that, well, the IRS will direct deposit your refund for nothing within 8-15 days doesn’t do them a bit of good when they don’t have a place to receive that direct deposit.

    I will grant that most of these people do not (financially) HAVE to take a RAL – but my experience is that no matter how hard you try to steer most clients in a different direction, they come back to the RAL. We offer an alternative product, the Refund Anticpation Check (RAC), which costs less, meets the same need as the RAL, and takes the same amount of time as the IRS process. I spend nearly as much time (if not more) explaining the financial options and the choices that people have when offering bank products as I do preparing the tax return. And they still overwhelmingly choose the RAL, even when I show them exactly what they are paying for the privilege of getting money in hand sooner and no matter how hard I try to have them look at the alternatives. A bird in the hand, and all that…

    Written by nctaxpro

    January 16, 2010 at 12:34 pm

    Posted in Taxes