Please note: This is an archived article. It does not apply to current-year tax preparation. Please see our current article to read up-to-date tax information.

Topics:

• What income is considered taxable income?
• I’ve heard that tax refunds will be delayed this year. Is that true?
• Do I have to pay taxes on welfare or food stamps/SNAP?
• I was out of work for part of 2010. Is the money I got from unemployment taxable?
• Are Social Security benefits taxable?
• I’m a veteran. How are my VA benefits treated?
• What is the difference between a W-2 and a 1099?
• I got a 1099-C. Why did I get this, and does it affect my taxes?
• What is the difference between exemptions, deductions, and credits?
• Important Tax Credits
• ITINs
• Free Tax Preparation for Low-Income Taxpayers

This article addresses some of the questions most frequently asked by Legal Services clients. It includes information about what qualifies as income for tax purposes, important credits you might be entitled to, how to file a tax return if you do not have a Social Security number, and other important information. If you do not feel that you are able to prepare your own tax return, you may be able to have your return prepared for free. Information about free tax preparation services is available below.

Read and understand your return before you sign it!

Also, make sure to read and understand your return before you sign and file it. You are ultimately responsible for everything on the return you signed, even if someone else prepared the return for you. Be careful! If you do not understand an entry made by a preparer, make sure you ask questions until you understand how and why the preparer completed the return that way, and only sign the return if you agree with it.

Some hard copy tax forms are no longer mailed to households automatically and may not be available at libraries or post offices. That means that you will either need to print the forms from the Internet or make a special request that they be mailed to you. For federal tax forms, go to the Internal Revenue Service (IRS) Forms and Publications resource page or call 1-800-829- 3676. For New Jersey tax forms, call 1-800-323-4400.

For a variety of reasons, many people put off filing their income tax returns—the forms can be difficult and confusing, and some people are afraid because they don’t have money to pay the taxes due. If you do not have the money to pay the taxes you owe, file your return anyway. This year, because of a holiday in Washington, D.C., called Emancipation Day, all federal tax returns and payments are due on or before Monday, April 18, 2011. If you do not file your return by the legal deadline, the IRS has the right to collect penalties in addition to any taxes you owe. If you do owe money, there may be alternatives to paying it all at once. These alternatives include entering into an installment plan, submitting an offer to pay a lesser amount, or getting the IRS to stop collection actions until your financial situation improves. The Tax Legal Assistance Project (TLAP) at Legal Service of New Jersey may be able to help you enter into one of these programs. But remember, you must first file your tax return in order to take advantage of these collection alternatives.

Top of page

What income is considered taxable income?

A lot of people think that wages are the only income that is subject to tax. That isn’t true. Taxable income can come from a variety of sources and must be reported on your tax return. In general, income from all sources is considered taxable, unless the Internal Revenue Code provides an exception. Some types of taxable income are:

• Wages, fees, commissions, fringe benefits, and other money paid to you for services
• Gross income from your own business
• Interest and dividends
• Rent received
• Tips
• Alimony received
• Money from settlement of a lawsuit or judgment, unless it involves personal injury
• Severance pay
• Cancellation of debt (such as reaching an agreement with a credit card company to pay less than what is due)
• Unemployment benefits
• Gambling winnings

Top of page

I’ve heard that tax refunds will be delayed this year. Is that true?

Because of recent changes to the tax law, some returns may not have been processed by the IRS until February 14, 2011. Returns that itemize deductions on Schedule A (see more on itemized deductions) or include higher education tuition and fees deductions and educator expense deductions are subject to the later processing deadline. Most other returns, such as those that include the Earned Income Tax Credit, child tax credits, and other important tax assistance, should not be delayed.

Top of page

Do I have to pay taxes on welfare or food stamps/SNAP?

You do not generally have to pay taxes on benefits you receive from a public welfare fund. This includes things like TANF or GA, Supplemental Security Income (SSI), child care grants, and housing assistance payments. Payments you receive from a state or other licensed foster care placement agency for the care of a foster child in your home are generally not included as taxable income. Similarly, most benefits paid by the Veterans Administration (VA) are not included (more information on VA benefits). Social Security for retirement or disability is discussed later.

Top of page

I was out of work for part of 2010. Is the money I got from unemployment taxable?

You must pay federal income tax on any unemployment insurance (UI) benefits you received from the government. When you made your initial UI benefit claim, you had a choice to voluntarily withhold taxes. If you selected this option, 10% of your weekly unemployment benefits was automatically sent to the IRS. You should receive a Form 1099-G, Certain Government Payments, showing the total amount you received in unemployment and the amount of taxes that have already been withheld from those payments. If you did not receive a 1099-G by the end of January, you should contact your local One-Stop Center to obtain a duplicate.

Top of page

Are Social Security benefits taxable?

If the only income you received in 2010 was Social Security retirement benefits or disability benefits, which includes survivor and disability benefits, your benefits generally are not taxable. However, if you had other sources of income, from work or investments, some Social Security or disability benefits may be taxable. You should receive a Form SSA-1099, Social Security Benefit Statement, showing the amount of Social Security benefits you received. You will need this in order to figure out if you owe taxes.

Top of page

I’m a veteran. How are my VA benefits treated?

Whether VA-related pay or benefits are taxable depends on the type of income. For example, veteran disability compensation and disability pension benefits are generally not treated as taxable income. Some other veteran grants and benefits, such as education, training and subsidence allowances, veteran insurance proceeds, and bonus payments from states or political subdivisions because of service in a combat zone, are also not taxable. Military retirement pay, however, is usually taxable and treated as pension income. For more information, see IRS Publication 525, which provides a summary of general taxation rules, with specific sections for active and retired military personnel and people with disability pensions. See Tax Information for Members of the U.S. Armed Forces (from the IRS Web site). The IRS also publishes an Armed Forces Tax Guide.

For purposes of state taxes, the New Jersey Department of Treasury, Division of Taxation, indicates that military pension or survivor’s benefit payments are not taxable for New Jersey gross income tax purposes. However, civil service pensions or annuities generally are taxable. You should also be aware that veterans sometimes receive extensions of deadlines to file New Jersey state income tax returns. The extension applies to U.S. Armed Forces in a combat zone or qualified hazardous duty area, and can last up to 180 days after they leave the combat zone, or following a hospitalization for injuries sustained in a combat zone. Some veterans in New Jersey also qualify for special property tax deductions or credits. For more information, visit the Division of Taxation’s website.

Top of page

What is the difference between a W-2 and a 1099?

If you were employed by someone else during 2010, your employer must send you a Form W-2. This is a statement that lists the total wages paid in 2010 and the amount of taxes that were withheld over the course of the year. A copy of your W-2 is also sent to the IRS—this is how the government knows how much you earned during the year.

A Form 1099-MISC is used where you have your own business and are an independent contractor. A 1099 is appropriate where, for example, you are soliciting business from different companies and where you make your own schedule, decide how the job is to be done, and use your own tools or equipment to complete the job. Being an independent contractor can have very large tax consequences. Because independent contractors act as both the boss and employee, they must pay both the employer and employee share of federal taxes. This can be very expensive. On the other hand, independent contractors can also take deductions for some of what they pay in taxes and the cost of travel, equipment, insurance, and other things they purchase for business purposes. This makes tax preparation more complicated and more expensive. You also must be prepared to prove that all of the deductions you took for the business are legitimate—so be sure to keep all of your receipts. If you are an independent contractor, you should receive a 1099-MISC from any business that paid you more than $600 for your services during 2010. Be sure to double check your 1099s to make sure they are correct.

Top of page

I got a 1099-C. Why did I get this, and does it affect my taxes?

If you received a 1099-C, it is because a governmental agency or financial institution has forgiven some or all of the money you owe that institution. This happens, for example, when you negotiate with a credit card company to pay less than the full amount you owe. That company is required to send you a 1099-C if it forgave more than $600 in debt.

Example: Joe had $8,000 in credit card debt. Joe lost his job and was unable to make payments on the account. He contacted his credit card company and negotiated to pay $3,000 as full payment on the account. Joe then received a 1099-C from the credit card company for $5,000 in cancelled debt ($8,000 debt - $3,000 payment = $5,000 cancelled debt).

The amount of the forgiven debt will appear in Box 2 of a Form 1099-C, Cancelled Debt, and may be taxable income. In general, cancelled debt is considered taxable income unless it otherwise qualifies for an exclusion or exemption. If you don’t have a lot of money, cancelled debt may be excluded because you were insolvent. You were insolvent if the amount of all of your liabilities was greater than the fair market value of all of your assets right before the debt was cancelled. Non-cash holdings, such as a retirement account, home, or car, count as assets in determining whether or not you were insolvent.

If you want to exclude cancelled debt from your income under the insolvency provision, you must complete and attach a Form 982 to your tax return. Homeowners who default on mortgage payments may qualify for an exclusion under the Mortgage Forgiveness Debt Relief Act.

Top of page

What is the difference between exemptions, deductions, and credits?

Exemptions reduce your taxable income. For the 2010 tax year, you can deduct $3,650 for each exemption you claim. You are generally allowed one exemption for yourself, one for your spouse, and one for each of your dependents. If you can be claimed as a dependent by another person, you cannot take a personal exemption, even if the other person does not actually claim you as a dependent. If you are a nonresident alien (other than a resident of Canada or Mexico), you can only use an exemption for yourself—you are not allowed to claim exemptions for dependents.

There are a lot of rules for claiming a dependent. For example, you may not claim a person as a dependent unless that person is a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico for some part of the year. A dependent must also have lived with you for more than 50% of the year. The chart below summarizes these rules.

Deductions are subtracted from your gross income and help to lower you taxable income. For example, if you earned $10,000 and had a tax deduction for $500, you would pay taxes on only $9,500 of income. You can use the standard deduction or take itemized deductions. Itemized deductions include things such as mortgage interest paid throughout the year, real property taxes paid, charitable contributions, certain medical expenses, and unreimbursed business expenses. You should use the standard deduction if it is higher than the total of your itemized expenses. The standard deduction depends on your filing status and whether you are 65 or older or blind. The standard deduction for 2010, if you file as single or married filing separately, is $5,700. It is $8,350 if you file as head of household and if you file as married filing jointly.

Credits are applied dollar for dollar against the amount of tax you owe. Credits are very important, because they lower the amount of tax you owe the IRS and can even get you a refund. There are a number of important credits you should know about, including the Earned Income Tax Credit (EITC), the Child Care and Additional Child Care Tax Credits, and the Child and Dependent Care Tax Credit. Each credit has different rules and works differently. Some credits simply reduce and possibly eliminate the tax you owe. Other credits are fully “refundable” and may actually put money in your pocket. Remember, you must file your tax return in order to claim a credit.

Overview of the Rules for Claiming an Exemption for a Dependent

Note: This table is a summary of the rules. For details, please see IRS Publication 501.

Source: IRS Publication 501 (2010)

Top of page

Important Tax Credits

If you worked in 2010, you may be eligible for a very important tax credit, called the Earned Income Tax Credit (EITC). The EITC is a refundable credit, which means that it not only reduces the amount of taxes you owe but may also give you a refund, even if you have no tax liability. In order to qualify for the EITC, you must have “earned” income, which includes income from wages, tips, and self-employment. Income from unemployment benefits, child or spousal support, and public benefits is not considered earned income and will not apply. The EITC is only available to you if you are a United States citizen or resident alien with a Social Security number.

To qualify for this credit, you must use the filing status of single, married filing jointly, head of household, or qualifying widower. You are ineligible for the EITC if you file as married filing separately. You must file a Form 1040 to claim this credit. You are not allowed to use Form 1040EZ or Form 1040A. If you had more than $3,100 in investment income from interest, rents, or dividends in 2010, you cannot take this credit.

The EITC is available if you are single or if you have children. To claim a child for the Earned Income Tax Credit, the child must meet relationship, age, residency, and citizen/resident tests. All of the following tests must be satisfied in order for a child to qualify.

• The relationship test. The child you are claiming must be your son, daughter, adopted child, stepchild, grandchild, or great-grandchild. The child may also be your brother, sister, stepbrother, stepsister, niece, nephew, or a descendant of these relatives. A foster child is also eligible, as long as the child was placed with you by an authorized placement agency.
• The age test. The child claimed must be under age 18 at the end of the year or a full-time student under age 24. To be a full-time student, the child must be enrolled in school full time for at least five months of the year.
• The residency test. The child must live with you in the United States for more than half the year.
• The citizen/resident test. The child must have a valid Social Security number.

The chart below lists the maximum amount of money you can earn and still get some EITC. It also lists the maximum amount of EITC credits available. Be careful—just because you qualify for the EITC does not mean that you will get the maximum credit available—that depends on how much money you earned during the year. The amount of the EITC increases as your earnings increase and then begins to phase out after you earn above a certain amount. That means that people with earnings at the low and high ranges of allowable income will get less in EITC.

2010 Federal EITC

EITC Changes to Watch for in 2011

Because of the economy, the EITC program was temporarily expanded to give an increased credit to those households with three or more children. This expansion was available for 2009 and 2010 and, unless the program is extended, it will expire next year. Also, the option of getting advance EITC payments in your paycheck has been eliminated. This means that beginning in tax year 2011, you will only be able to claim the EITC on your tax return.

New Jersey EITC. The state EITC is available to most households that qualify for the federal EITC. There are two main differences between the federal and New Jersey EITC. This year, a law was passed that reduced the New Jersey EITC from 25% of the applicable federal credit to 20% of the federal EITC. This means that, if you qualified for a federal EITC of $1,000, you would be eligible for an additional state EITC of $200.

To apply for the state credit, you must file a New Jersey resident income tax return and complete the New Jersey Earned Income Tax Credit form. If you have questions about the state EITC, call the New Jersey Earned Income Tax Credit Hotline at 1-888-895-9179.

The Child Tax Credit may be available to you if you have a child who was under the age of 17 at the end of 2010. The child may be your son, daughter, stepson, stepdaughter, adopted child, brother, sister, niece, nephew, grandchild, or eligible foster child (one placed with you by a court or authorized placement agency). You must be able to get a dependent exemption on your return for the child, and the child must be a citizen or resident alien with a Social Security number.

For each dependent child you claim, you get $1,000 deducted from the taxes you owe to the government. Generally, the credit will only lower the amount you have to pay in taxes and does not pay you a refund. However, if your income does not qualify you to take the full amount of the child tax credit, you may qualify for the Additional Child Tax Credit. If you qualify for this credit, you may get a refund even if you do not owe any tax. You must use IRS Form 8812 to claim the additional child tax credit.

The Child and Dependent Care Tax Credit provides a credit to you by reducing your taxes by a percentage of the money you spent on child and adult care because you needed to go to work or look for work. You must have at least one dependent under the age of 13, or a dependent spouse or child who is physically or mentally disabled. The amount of the credit will depend on your income and the amount of money you spent on eligible care during the year. The child or adult for whom you are claiming the credit must be a U.S. citizen or alien resident with a Social Security number. You also need a Social Security number to claim the credit. If you file your return using an ITIN, you are not able to claim this credit. You cannot use Form 1040EZ to claim this credit.

Top of page

ITINs

If you earned money in the United States, you may have an obligation to file a tax return, even if you do not have a Social Security number. The information below will show you how to file a tax return if you do not have a Social Security number and are not eligible for one.

I want to file a tax return, but I don’t have a Social Security number. What should I do?

If you don’t have a Social Security number, you should prepare your tax return and apply for an Individual Taxpayer Identification Number (ITIN). An ITIN is a nine-digit number that the IRS can give to people who do not have a Social Security number and are not eligible to receive a Social Security number. This means that if you have an immigration status that allows you to apply for a Social Security number, then you cannot get an ITIN. But if you have an immigration status that does not allow you get a Social Security number, then you can get an ITIN.

An ITIN is intended to help you file a federal tax return with the IRS only. An ITIN does not:

• Authorize you to work in the U.S.
• Change your immigration status
• Give you an identification that you can use to obtain a driver’s license
• Allow you to qualify for public benefits or the Earned Income Tax Credit.

Why should I have an ITIN?

Having an ITIN can benefit you for both tax- and non-tax-related reasons. The tax-related benefits of an ITIN are that:

• If you have earned income, it may be against the law not to file an income tax return.
• It is the only way for you to file an income tax return if you do not have any immigration status.
• It can allow you to claim a tax refund from the IRS.
• It can allow you to claim the child tax credit from the IRS.
• It can allow you to file a joint tax return with a spouse.
• It can allow you to obtain tax exemptions for minor children.

The non-tax-related benefits of an ITIN are that it can:

• Help you prove good moral character and your physical presence in the United States if you ever become eligible to apply for an immigration status
• Allow you to open a bank account at some banks.

How do I apply for an ITIN?

There are three basic requirements in applying for an ITIN.

The first is to complete IRS Form W-7. The W-7 is a one-page form. It takes about 20 minutes to complete. It asks for basic information about you, such as your name, country of citizenship, address, and your date and place of birth. It also asks you to identify the reason that you are applying for an ITIN.

The second requirement is to file a valid federal income tax return. This will probably be IRS Form 1040. You generally cannot apply for an ITIN unless you also send the IRS a completed income tax return together with the Form W-7.

The third requirement is to provide the IRS with identification documents. The IRS requires that the document or combination of documents that you send with your ITIN application shows your name and photograph, and establishes that you are not a citizen of the United States. The most common forms of identification that the IRS accepts are a passport, a foreign driver’s license, a foreign military card, a national identification card, or a birth certificate. If you are applying for an ITIN for a child under 14, then you can also use school or medical records. You should normally submit copies (rather than originals) of your identification documents. But the IRS requires that the copies of your identification documents be notarized.

When should I apply for an ITIN?

You should apply for an ITIN as soon as you are ready to file a federal income tax return. You can apply for an ITIN at any time of the year. But if the tax return that you attach to your ITIN application is filed after the due date, then you may owe extra money to the IRS.

Where should I send my ITIN application and tax return?

Because your tax return is an attachment to your ITIN application, you should not mail the tax return separately. You must mail both the Form W-7 and the tax return together.

If you send your ITIN application by U.S. mail, you must send it to:

Internal Revenue Service
ITIN Operations
P.O. Box 149342
Austin, TX 78714-9342

If you send your ITIN application through an overnight delivery service, then you should send it to:

Internal Revenue Service
ITIN Operations
Mail Stop 6090-AUSC
3651 S. Interregional, HWY 35
Austin, TX 78741-0000

How long does it take to get an ITIN?

After you have mailed your ITIN application to the IRS, it will probably take at least six weeks for you to receive your ITIN. If you send your ITIN application to the IRS during the tax season (between January 15 and April 30), then it will probably take 8-10 weeks for you to receive your ITIN.

Can I get help in preparing an ITIN application?

Yes. Probably the best way to get help in completing your ITIN application is to contact a Low Income Tax Clinic in your area or to go directly to a local IRS office. The IRS has local offices throughout New Jersey. See the IRS Local Office Locator to find the New Jersey IRS office nearest you. An IRS local office can help you complete the IRS Form W-7, review your identification documents, and send your application to the ITIN processing center.

Another way to get help is to go to what is called an “Acceptance Agent.” An Acceptance Agent is a person or organization that the IRS has authorized, after receiving training, to help people apply for ITINs. Be careful of notaries! They may advertise that they perform this service, but they may not be authorized by the IRS. Also, an Acceptance Agent will probably charge you a fee for the work that they do for you.

If I apply for an ITIN, will the IRS report me to the immigration authorities?

No. Privacy laws prevent the IRS from reporting you to the immigration authorities if you have applied for an ITIN.

Top of page

Free Tax Preparation for Low-Income Taxpayers

If you are a low-income taxpayer there are a number of different services that you can use to help you to prepare and file your taxes for free.

IRS Free File Program. The IRS Free File program makes commercial tax preparation software available to low-income taxpayers at no cost. If you earned less than $58,000 in 2010, these programs will help you to complete and file your tax return for free. To use Free File, you must have access to the Internet. Start the process by going to the IRS website's Free File page. You will need to select the tax software that best suits your needs. Once you choose a preparer, you will leave the IRS Web site and be taken to the commercial preparer’s site. The software will prompt you to enter answers to a series of questions related to income and family. A federal tax return will be prepared based on your answers to these questions. The return will then be filed electronically. Note that this may not be an option for filing your state tax return, so you may want to consider one of the other in-person tax preparation options listed below.

Volunteer Income Tax Assistance (VITA). The VITA program generally offers free tax preparation services to people with incomes below $49,000. VITA sites are staffed with volunteers who are trained to prepare tax returns. The sites are usually located at libraries, senior centers, and other local community centers. To find the VITA center in New Jersey nearest you, call 1-800-906-9887 or visit the IRS website's New Jersey VITA Sites page.

AARP Tax-Aide. AARP also sponsors free tax-preparation services for people with low and moderate incomes. There is no age limitation, but special attention is provided to people age 60 and older. For more information about the Tax Aide program or to find a site near you, go to the AARP Tax-Aide website or call 1-888-AARPNOW.

Tax Counseling for the Elderly (TCE). The TCE program provides free tax preparation to people age 60 and older. For more information on TCE, call 1-800-829-1040.

Armed Forces Tax Council (AFTC). The AFTC coordinates tax programs for the Army, Air Force, Navy, Marine Corps, and Coast Guard and oversees the operation of the military tax programs worldwide. The IRS works with the AFTC in advance of military deployments to help address tax issues and filing concerns. Military members and their families worldwide can receive free tax preparation assistance at designated centers. Staff in these offices are trained to handle military-specific tax issues, such as combat zone tax benefits. Check with your local installation to see if they sponsor a free tax preparation program.

Top of page

This information last reviewed: Nov 2, 2011